MyState Limited Directors Report

Transcription

1 Directors Report MyState Limited ABN Directors Report Your Directors present their report on MyState Limited (the Company) for the financial year ended 30 June Directors and Company Secretary The names and particulars of the Directors and Company Secretaries in office during the year and since the end of the year are: Miles L Hampton BEc(Hons), FCIS, FCPA, FAICD Chairman and independent non-executive Director (appointed as Chairman 29 October 2013) Michael J Vertigan AC, BEc(Hons), PhD, Hon LLD, FAICD Chairman and independent non-executive Director (Resigned as Director and Chairman 29 October 2013) Melos A Sulicich BBus, FAIM, GAICD Managing Director - Executive Director (Appointed 1 July 2014) G John Gilbert BCom, FAICD, FAMI Managing Director - Executive Director (Resigned as Director 31 March 2014) Peter D Armstrong BEc(Hons), DipED, Dip FP, CPA, FAICD, FAMI Independent non-executive Director Robert L Gordon BSc, MIFA, MAICD, FAMI Independent non-executive Director Colin M Hollingsworth CPA, MAICD, FAMI Independent non-executive Director Stephen Lonie BCom, MBA, FCA, Senior FFin, FAICD, FIMCA Independent non-executive Director Ian G Mansbridge CPA, FCIS, FCIM Independent non-executive Director Sarah Merridew BEc, FCA, FAICD Independent non-executive Director Scott A Lukianenko Ad Dip BMgmt, Grad Cert BA, GIA (Cert) Company Secretary (Appointed 1 November 2013) Lindsay T Scott B Bus, MBA, FCPA, FCSA, FCIS, MAICD Company Secretary (Resigned 29 November 2013) 1

2 Directors Report Principal Activities Banking Services Trustee Services Wealth Management Transactional and internet banking Insurance and other alliances Savings and investments Business banking Agribusiness Personal and business lending Estate planning Estate and trust administration Power of attorney Corporate and custodial trustee Financial planning Managed fund investments Portfolio administration services Portfolio advisory services Private client services MyState Limited, the listed diversified financial services group based in Tasmania, provides a range of financial products and services to existing and new customers through its whollyowned subsidiaries MyState Financial Limited and The Rock Building Society Limited, both authorised deposit-taking institutions, and Tasmanian Perpetual Trustees Limited the trustee and wealth management company. There have been no significant changes in the nature of the principal activities of the Group during the financial year. In the opinion of Directors, there has not arisen, in the period between the end of the financial year and the date of this report, any material item, transactions or events that is likely to significantly affect the operations of the consolidated entity. Operating and Financial Review The Group s net profit after income tax for the year ending 30 June 2014 was $ million (2013: $ million). 2

3 Directors Report Dividends The Directors have declared a fully franked (at 30%) final dividend of 14.5 cents per share. The dividend will be payable on 3 October 2014 to shareholders on the register at 5pm EST on 12 September Dividends paid in the year ended 30 June 2014 were as follows: In respect of the year to 30 June 2013, a fully franked dividend of 14 cents per share amounting to $ million was paid on 4 October In respect of the year to 30 June 2014, a fully franked dividend of 14 cents per share amounting to $ million was paid on 6 March Total dividends paid from the 2014 results amount to 28.5 cents per share and the payout ratio of 84% remains in the Board s policy range of 70% to 90%. Review and Results of Operations Profit after income tax for the year ended 30 June 2014 increased by 3.9% to $ million, during a period of challenging top line revenue growth. Credit growth was particularly soft during the first half, which combined with challenges in the distribution network, resulted in the portfolio declining 1.3% by the end of the first half. However the second half was more encouraging, with positive momentum returning, and the loan book recovering to finish with annual growth of 0.4% by year end. Improved net interest margin was achieved through disciplined liability management, increasing the net interest margin from 2.40% to 2.43% in However net interest income fell as the improved funding costs were insufficient to offset the decline in the loan book during the first half of the year. Softness in lending activity, and a greater share of originations sourced through the broker channel, impacted cross selling opportunities in Combined with a further deterioration in consumer transaction fee income, non-interest revenues declined $2.1m / 5.8% for the year. Prudent cost management during 2014 saw the cost-to-income ratio fall from 65.6% to 64.5%. MyState s banking business delivered a flat performance for the 12 month period, with Net Profit after Tax declining $0.2m / 0.9% against the prior year. MyState Financial s portfolio increased by 3.1%, to $2.2 billion and The Rock s portfolio contracted by 5.7% to $0.9 billion. Overall the banking business portfolio improved a modest 0.4%, aided by improved level of originations sourced through the broker channel. The Group s wealth management business, delivered an increased contribution in 2014, with Net Profit after Tax improving $1.5m / 46.4% on the prior year. Funds under management (FUM) grew 5.8% to $1.007b in 2014, generating additional revenues from management fees. 3

4 Directors Report Looking forward, Mystate is seeking to drive profit improvement through revenue growth. Focus in the banking business will continue on leveraging increased sales momentum through broker distribution networks, in conjunction with improved sales management in the direct channel. In the wealth management arm, the emphasis will remain on product development and rationalisation activities, as well as improving product penetration across the Group s customer base. State of Affairs During the financial year, there was no significant change in the state of affairs of the Company other than referred to in the review and results of operation above. Events Subsequent To Balance Date In the opinion of the Directors, there has not arisen, in the period between the end of the financial year and the date of this report, any material item, transactions or event that is likely to significantly affect the operations of the consolidated entity. Likely Developments and Expected Results Directors do not foresee any material changes in the likely developments in the operations or the expected results of those operations in future financial years. Directors consider that the disclosure of additional information in respect of likely developments in the operations or the expected results of those operations may unreasonably prejudice the Company. Accordingly, this information has not been disclosed in this report. Environmental Regulation The consolidated entity is not subject to significant environmental regulation. Directors Meetings The number of meetings of Directors (including meetings of the Committees of Directors) held during the year and the number of meetings attended by each director are as indicated in the table below: 4

5 Directors Report MyState Limited Directors Meetings 2013/2014 Board Meetings Meetings Meetings Meetings Meetings Meetings Meetings A B A B A B A B A B A B A B M J Vertigan M L Hampton P D Armstrong R L Gordon C M Hollingsworth S E Lonie I G Mansbridge S Merridew G J Gilbert 8 8 A - Number of meetings attended B - Number of Meetings Eligible To Attend Group Audit Committee Group Risk Committee Group Corporate Governance & Remuneration Committee Group Remuneration Committee Group Nomination Committee Group Nominations & Corporate Governance Committee Directors Interests Interest in the shares of the Company and Managed Investment Funds offered by a related Body Corporate as at the date of this report. Beneficially Non-beneficially Managed Managed Held Held Funds Direct Funds Indirect P D Armstrong R L Gordon M L Hampton - 600, C M Hollingsworth 3,000 7, S E Lonie - 50, I G Mansbridge - 170, S Merridew 4,000 20, M A Sulicich Indemnification and Insurance of Directors and Officers The Company has paid, or agreed to pay, a premium in relation to a contract insuring the Directors and Officers listed in this report against those liabilities for which insurance is permitted under Section 199B of the Corporations Act The Company has not otherwise, during or since the relevant period, indemnified or agreed to indemnify an Officer or Auditor of the Company or of any related body corporate against a liability incurred as such an Officer or Auditor. 5

6 Directors Report Non-Audit Services During the year Wise Lord & Ferguson, the Company s auditor has performed certain other services in addition to their statutory duties. Further details are set out in Note 6a to the financial statements. The Board has considered the non-audit services provided during the year by the auditor and in accordance with written advice provided by the Group Audit Committee, is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001, for the following reasons: All non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Group Audit Committee to ensure they do not impact the integrity and objectivity of the auditor; and, The non-audit services provided do not undermine the general principles relating to the auditor independence as they related to technical disclosure issues. Auditor s Independence Declaration to the Directors The Directors received the following declaration from the auditor of the Company: In relation to our audit of the financial report for the consolidated group for the financial year ended 30 June 2014, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. This declaration is in respect of MyState Limited and the entities it controlled during the period. D McCarthy Partner Wise Lord & Ferguson Hobart Dated 21 August

7 Remuneration Report MyState Limited Remuneration Report This Remuneration Report forms part of the Directors Report and outlines the Director and Executive remuneration arrangements of MyState Limited (the Company or MYS) for the year ended 30 June 2014 in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of this report, Key Management Personnel (KMP) are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company, directly or indirectly, including any Director (whether Executive or otherwise) of the Company. Contents 1. Group Remuneration Committee 2. Remuneration Philosophy 3. Consequences of Performance on Shareholder Wealth 4. Key Management Personnel 5. Non-Executive Director Remuneration 6. Managing Director and Chief Executive Officer and Executive Remuneration 6.1 Fixed Annual Remuneration 6.2 Short Term incentive 6.3 Executive Long Term Incentive Plan 7. Remuneration of Key Management Personnel 8. Shareholdings of Key Management Personnel 9. Loans to Key Management Personnel 10. Contract Terms and Conditions 1. Group Corporate Governance and Remuneration Committee The Board has established a Group Remuneration Committee (GRC) that assists the Directors in discharging the Board s responsibilities in relation to remuneration and human resource responsibilities by reviewing and making recommendations to the Board on: Remuneration Policy and arrangements for Directors, the Managing Director and Chief Executive Officer and other Executives; Remuneration Policy and practices of the Company, having regard to comparative remuneration in the financial services industry and independent advice. This includes an assessment of the Remuneration Policy s effectiveness and compliance with the requirements of APRA Prudential Standards; applicable Human Resource (HR) Policies and practices and ratification of Industrial instruments to ensure compliance with all legal and regulatory requirements; matters such as the Company s Employee Share Scheme or other incentive schemes for Executives and staff; and succession planning to ensure the Company has sufficiently skilled staff to competently perform their roles, as well as review and recommendation to the Board in respect of broader organisational health. The Committee is vigilant in monitoring the potential for, or perception of, conflict of interest regarding Executive Director involvement in Board decisions on remuneration packages and also in monitoring the involvement of Management generally in Committee discussions and deliberations regarding remuneration policy. No Executive is directly involved in deciding their own remuneration. 2. Remuneration Philosophy The fundamental objective of the Company s Remuneration Policy is to maintain behaviour that supports the sustained financial performance and security of the Group and to reward Executive and Management efforts which increase shareholder and customer value. The Remuneration Policy is premised on: appropriately balanced measures of performance; variable performance based pay for Executives involving short and long-term incentive plans; recognition and reward for strong performance; a considered balance between the capacity to pay and the need to pay to attract and retain capable staff at all levels; Page 35

8 Remuneration Report the exercise of Board discretion as an ultimate means to mitigate unintended consequences of variable pay and to preserve the interests of the Shareholders; and short-term and long-term incentive performance criteria being structured within the overall risk management framework of the Company. In accordance with best practice corporate governance, the structure of Non-Executive Director remuneration is separate and distinct from Executive remuneration. The Company links the nature and amount of the remuneration of the Executive Management Team (EMT), comprising the Managing Director and Chief Executive Officer and Executives directly reporting to the Managing Director and Chief Executive Officer, to its financial and operational performance. The remuneration of the EMT is based on a package which from time to time may comprise one or more of the following: fixed annual reward (inclusive of superannuation and fringe benefits) (FAR); cash based short term incentives (STI); equity based long term incentives (ELTIP). 3. Consequences of performance on Shareholder wealth In considering the Company s performance and benefits for Shareholder wealth, the GRC has regard to the following indices: Indicator 2010 $ 000 Change 2011 $ 000 Change 2012 $ 000 Change 2013 $ 000 Change 2014 $ 000 Profit after income tax Earnings per share (cents) 17, % 22, % 23, % 28, % 29, % % % % Dividends paid 13, % 16, % 19, % 24, % 24,417 Share price (dollars) % 3.51 (13.1) % % 4.64 Return of capital Nil Nil Nil Nil Nil The Company ultimately assesses its performance from increases in earnings and shareholder value. The performance measures for triggering both the Company s cash based Short Term Incentive Plan (STI) and Executive Long Term Incentive Plan (ELTIP) have been tailored to align at risk remuneration and performance hurdle thresholds to the delivery of financial and operational objectives and sustained shareholder value growth. STI performance measures include financial measures such as net profit after tax. ELTIP performance measures are: for the 2010 offer weighted equally between earnings per share and total shareholder return (TSR) measures; and for the 2011, 2012, and 2013 offers based solely on TSR. TSR is a measure which incorporates both dividends paid and movements in share prices. 4. Key Management Personnel The Key Management Personnel (KMP) of the Company in office during the year and up to the date of this report were as follows: Name Position Change from FY13 Non Executive Directors Miles Hampton Non Executive Chairman Appointed Chairman 30 October 2013 Michael Vertigan Non Executive Chairman Retired as Chairman and Director 30 October 2013 Peter Armstrong Robert Gordon Colin Hollingsworth Stephen Lonie Ian Mansbridge Sarah Merridew Non Executive Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director Non Executive Director Page 36 MyState Limited 2014 Annual Report

9 Name Position Change from FY13 Executive Directors Melos Sulicich John Gilbert Executives David Mills Andrew Paynter Stephen Pender Aaron Pidgeon Tim Rutherford Managing Director and Chief Executive Officer Managing Director and Chief Executive Officer Head of Technology Chief Executive Officer The Rock Head of Marketing, Communications and Products Head of People and Property Chief Operating Officer Acting Chief Executive Officer Appointed 1 July 2014 Retired 31 March 2014 Appointed as Acting CEO 31 March 2014 Resumed as COO 1 July 2014 Tom Taylor Chief Financial Officer Contracted to role in fixed term capacity, September 2014 Natasha Whish-Wilson Chief Risk Officer 5. Non-Executive Director Remuneration The Company s Non-Executive Directors (NEDs) receive only fees (including statutory superannuation) for their services and the reimbursement of reasonable expenses. These fees may be taken as shares subject to prior shareholder approval. They do not receive any retirement benefits (other than compulsory superannuation). The fees paid to the Company s NEDs reflect the demands on and responsibilities of those Directors. The Board reviews its fees to ensure the Company s NEDs are fairly remunerated for their services, recognising the level of skill and experience required to conduct the role and to have in place a fee scale which enables the Company to attract and retain talented NEDs. The advice of independent remuneration consultants is taken to ensure that the Directors fees are in line with market standards. The aggregate remuneration paid to all the NEDs (inclusive of statutory superannuation) may not exceed the $950,000 amount fixed by Shareholders at the October 2012 Annual General Meeting of Shareholders. This fee pool is only available to NEDs, as Board membership is taken into account in determining the remuneration paid to Executive Directors as part of their normal employment conditions. Each NED currently receives $85,000 each per annum inclusive of statutory superannuation. The Chairman is paid an additional amount of $85,000 per annum inclusive of statutory superannuation. Board Committee Chairmen are paid an additional amount of: Group Audit, $15,000; Group Risk, $12,500; and Group Remuneration, $12,500, per annum inclusive of statutory superannuation. Additionally, Members of Board Committees are paid $5,000 per annum per committee inclusive of statutory superannuation. 6. Managing Director and Chief Executive Officer and Executive Remuneration 6.1 Fixed Annual Remuneration (FAR) The FAR is paid by way of cash salary, superannuation and salary sacrificed fringe benefits and is reviewed annually by the GRC. In addition, external consultants provide analysis and advice to the Committee to ensure that Executives remuneration is competitive in the marketplace. It reflects the complexity of the role, individual responsibilities, individual performance, experience and skills. The total employment cost of the remuneration package, including fringe benefits tax, is taken into account in determining an employee s FAR. Page 37

10 Remuneration Report 6.2 Short Term Incentive (STI) The STI is an annual at risk incentive payment. It rewards EMT members for their annual contribution towards the achievement of the Company s strategic goals. The maximum potential payment is calculated as a percentage of the FAR of each EMT member and is payable annually as cash and/or superannuation contributions. Payment is conditional upon the achievement, during the financial year under review, of financial and non-financial performance objectives. The measures are chosen and weighted to best align the individual s reward to the Key Performance Indicators (KPI s) of the Company and its overall performance. In most cases there is no fixed minimum payment amount, and there may not be any payment made where appropriate. The KPIs are measures relating to Company and personal performance accountabilities and include financial, strategic, operational, cultural, compliance and risk management requirements and customer/stakeholder measures. The measures are chosen and weighted to best align the individual s reward to the KPIs of the Company and its overall long term performance. KPIs are weighted towards the achievement of profit growth targets. Each year, the GRC, in consultation with the Board, sets the KPI s for the Managing Director and Chief Executive Officer who, in turn, sets KPI s for Executives. The GRC selects performance objectives which provide a robust link between Executive reward and the key drivers of long term shareholder value. At the end of the financial year, the GRC assesses the performance of the Managing Director and Chief Executive Officer against the KPIs set at the beginning of the financial year. At the end of the financial year the Managing Director and Chief Executive Officer assesses the performance of the Executives against their KPIs set at the beginning of the financial year. Based upon that assessment, a recommendation for each Executive is made to the GRC as to the STI payment. The GRC recommends the STI payments to be made to the Managing Director and Chief Executive Officer and Executives for approval by the Board. Approval and payment of a STI to the Managing Director and Chief Executive Officer or Executives is at the complete discretion of the Board. If the results on which any STI reward was based are subsequently found by the Board to have been the subject of deliberate management misstatement, the Board may require repayment of the relevant STI, in addition to any other disciplinary actions. Current STI Offers Details of STI bonuses that affect the calculation of KMP remuneration for the 2013/14 financial year are set out in the following tables. During the financial year KMP were paid their STI entitlement, as assessed, in respect of the 2012/13 financial year. Assessment of STI bonuses in respect of the 2013/14 financial year has, in most cases, been completed by the Group Risk Committee and Board during August Details of the amounts paid and forfeited are set-out in the accompanying table. 2012/2013 STI Bonus EXECUTIVE Max. % (of FAR) Max Payable % Awarded % Forfeited Amount Paid % Which is not yet assessed for payment John Gilbert 50% $327,600 80% 20% $262,080 -% David Mills 15% $25,800 85% 15% $21,930 -% Andrew Paynter 20% $44,731 85% 15% $38,021 -% Stephen Pender 15% $26,359 85% 15% $22,405 -% Aaron Pidgeon 15% $37,056 85% 15% $31,498 -% Tim Rutherford 30% $115,366 80% 20% $92,292 -% Tom Taylor (1) 58.3% $196, % 14.29% $168,180 -% Natasha Whish-Wilson 30% $96,314 80% 20% $77,052 -% Page 38 MyState Limited 2014 Annual Report

11 2013/2014 STI Bonus EXECUTIVE Max. % (of FAR) Max Payable % Awarded % Forfeited Amount Paid % Which is not yet assessed for payment John Gilbert 50% $327,600 31% 69% $100,000 -% David Mills 15% $30,000 43% 57% $12,750 -% Andrew Paynter 15% $37,015 -% -% 100% Stephen Pender 15% $30,000 30% 70% $9,000 -% Aaron Pidgeon 15% $41,625 43% 57% $17,700 -% Tim Rutherford 30% $120,263 33% 67% $39,100 -% Tom Taylor (1) 58.3% $112,088 -% -% 100% Natasha Whish-Wilson 30% $99,806 33% 67% $32,500 -% (1) Since his engagement as Chief Financial Officer, Mr Taylor has been continuously employed under several fixed term contracts. Due to the nature of this engagement, which does not coincide with the annual performance period applying to other members of the EMT, he has been offered STI bonuses in respect of each contract period. After the conclusion of each period Mr Taylor s entitlement to an STI payment has been assessed and paid. The maximum STI payment, as a percentage of FAR, applying to Mr Taylor s offers, takes account of the fact that he is not entitled to receive any reward under the ELTIP. 6.3 Executive Long Term Incentive Plan (ELTIP) The ELTIP provides a long term at risk incentive, assessed over a three year performance period. It was established by the Board to reward the Executive Management Team (EMT), comprising the Managing Director and Chief Executive Officer and participating Executives to have a greater involvement in the achievement of the Company s objectives. To achieve this aim, the ELTIP provides for the issue to participating Executives of fully paid ordinary shares in the Company if performance criteria specified by the Board are satisfied in a set performance period. Under the ELTIP, an offer may be made to individual members of the EMT every year as determined by the Board. The maximum value of the offer is determined as a percentage of the FAR of each member of the EMT. As a general guide, noting that the Board has absolute discretion to vary, the maximum percentages used are 50% for the Managing Director and Chief Executive Officer and between 15% and 30% for participating Executives. The value of the offer is converted into fully paid ordinary shares based upon the weighted average price of the Company s shares over a twenty trading day period to be determined by the Board. In order for the shares to vest in each eligible member of the EMT, certain performance criteria must be satisfied within a predetermined performance period. Both the performance criteria and the performance period are set by the Board at its absolute discretion. The Board has, for the time being, set the three financial years, commencing with the year in which an offer is made under the plan as the performance period, with relative Total Shareholder Return (TSR) and absolute Return on Equity (ROE) as the performance criteria. The ELTIP provides for an independent Trustee to acquire and hold shares shares on behalf of the participating Executives. The Trustee is funded by the Company to acquire shares, as directed by the Board, either by way of purchase from other Shareholders on market, or issue by the Company. Vesting of shares occurs once an assessment has been made after the performance period (currently 3 years) and once the Board resolves to notify the Trustee to issue entitlements under the relevant ELTIP Offer. Where shares have vested the Trustee will allocate those shares to each eligible member of the EMT in accordance with their entitlement. The Trustee will hold the shares which have been allocated on behalf of the eligible EMT member. During the period that allocated shares are held by the Trustee, the eligible EMT member is entitled to receive the income arising from dividend payments on those shares and to have the Trustee exercise the voting rights on those shares in accordance with their instructions. The participating EMT member cannot transfer or dispose of shares which have been allocated to them until the earlier of: the seventh anniversary of the original offer date of the grant; upon leaving the employment of the Company; upon the Board giving permission for a transfer or sale to occur; or upon a specified event occurring, such as a change in control of the Company. Upon request, the Board will release vested shares to an Executive to the extent required to meet a taxation assessment directly related to the award of those shares. On separation from the Company, ELTIP shares will be released only if the separation is due to a Qualifying Reason or is at the initiation of the Company without cause. Effective as of the 2014 ELTIP Offer if this separation occurs within the three year performance period, shares will be allocated on a pro-rata basis, following the completion of each applicable performance period and applicable performance assessment. Page 39

12 Remuneration Report A Qualifying Reason as defined by the ELTIP Plan Rules is death, total and permanent disability, retirement at normal retirement age, redundancy or other such reason as the Board in its absolute discretion may determine. Vesting of shares to the Managing Director and Chief Executive Officer and eligible Executive is at the complete discretion of the Board. Any shares to be allocated to the Managing Director and Chief Executive Officer under this Plan require Shareholder prior approval in accordance with ASX Listing Rules. On accepting an ELTIP offer made by the Company, participating Executives are required to not hedge their economic exposure to any allocated non-vested entitlement. Failure to comply with this directive will constitute a breach of duty and may result in forfeiture of the offer and/or dismissal. Current ELTIP Offers Details of offers made under the ELTIP to KMP that affect the calculation of their remuneration in this financial year are set out in the following table. Offer "2010" "2011" "2012" "2013" Performance Period 1 July 2010 to 30 June July 2010 to 30 June July 2010 to 30 June July 2010 to 30 June 2014 Performance Criteria Measure 50% Earnings per share (EPS) 50% Total Shareholder Return (TSR) 100% Total Shareholder Return 100% Total Shareholder Return 100% Total Shareholder Return The comparator group Calculation of the reward Performance assessment will be measured against a selected group of financial companies. (Refer to the list following) Shares will vest in accordance with the following schedule EPS baseline for calculation of the offer Share price baseline for TSR calculation Offer Date Managing Director and Chief Executive Officer (1) Other Eligible Executives 27.46cps N/A N/A N/A $3.12 $3.55 $3.00 $ March November November December March September October December 2013 Share Priced Used in Calculations Managing $3.76 $3.58 $3.63 $4.82 Director (1) Value of Offer (2) Other Eligible Executives Managing Director and Chief Executive Officer (1) Other Eligible Executives $3.76 $3.58 $3.37 $4.82 $225,000 $235,125 $325,000 $327,600 $393,789 $316,482 $163,500 $220,069 (1) These offers were made to the former Managing Director and Chief Executive Officer. (2) The value of the offer is calculated as at the date of offer to the KMP at that time. As such, it may include the value of offers made to individuals who are no longer KMP of the Company. Page 40 MyState Limited 2014 Annual Report

13 The Comparator Group ASX Ticker AMP ANZ BEN BOQ CBA CCP CCV CGF FXL HGG IAG IFL MQG NAB PPT QBE SUN WBC WBB Name AMP Ltd Australia & New Zealand Banking Group Ltd Bendigo and Adelaide Bank Ltd Bank of Queensland Ltd Commonwealth Bank of Australia Credit Corp Group Ltd Cash Converters International Challenger Ltd Flexigroup Ltd Henderson Group Plc Insurance Australia Group Ltd IOOF Holdings Ltd Macquarie Group Ltd National Australia Bank Ltd Perpetual Ltd QBE Insurance Group Ltd Suncorp Group Ltd Westpac Banking Corporation Wide Bay Australia Ltd Calculation of the Reward The ELTIP reward for the performance period will be based upon the comparison of the Company s actual TSR performance compared to the comparator group and will be payable on the following basis: below the mid-point percentage 0% reward; at the 50th percentile 50% of the applicable reward; between the 50th percentile and the 75th percentile 50% plus 2% for every 1 percentile above the 50th percentile; above the 75th percentile 100% of the applicable reward; no reward will be payable if performance is negative irrespective of the benchmark group performance. Page 41

14 Remuneration Report Actual and Potential ELTIP Share Allocations The following table details, for current KMP, the status of offers made under the ELTIP. The table details the maximum number of shares granted, the number now forfeited, vested and the number for which the assessment for vesting remains outstanding. It also details the maximum amount which could be disclosed as KMP remuneration in subsequent financial years. During the financial year the assessment of the 2010 offer was completed and shares were issued accordingly. The 2011 offer performance period was completed on 30 June 2014 and the assessment of this offer was completed by the GRC and Board during August Following Mr Gilbert s retirement on 31 March 2014, an assessment was made of his entitlement under the 2011, 2012 and 2013 offers and shares were issued accordingly. Name Maximum Offer Forfeited Vested in the 2013/14 Financial Year Not yet assessed for Vesting Maximum possible amount to be recorded as remuneration in subsequent financial years Number Number Number Number $ "2010" Offer (TSR) John Gilbert 29,920 2,453 27,467 Tim Rutherford 10, ,439 "2010" Offer (EPS) John Gilbert 29,920 14,960 14,960 Tim Rutherford 10,280 5,140 5,140 "2011" Offer John Gilbert 65,677 65,677 Tim Rutherford 21,595 21,595 "2012" Offer John Gilbert 89,532 61,988 27,544 Tim Rutherford 26,261 26,261 16,008 Natasha Whish-Wilson 22,255 22,255 13,566 "2013" Offer John Gilbert 67,967 67,967 Tim Rutherford 24,951 24,951 51,406 Natasha Whish-Wilson 20,707 20,707 42,662 Page 42 MyState Limited 2014 Annual Report

15 7. Remuneration of Key Management Personnel Salary & Fees $ Cash (1) (2) Bonus Non-Monetary Benefits $ Post Employment Superannuation $ Termination Benefits $ Share Based Total (1) (3) Payment $ Non-Executive Directors Miles Hampton ,062 12, , ,554 7,610 92,164 Michael Vertigan ,135 4,637 54, ,312 13, ,110 Peter Armstrong ,061 24,146 96, ,398 18,160 91,558 Robert Gordon ,777 10,859 90, ,683 6,811 82,494 Colin Hollingsworth ,831 35,074 98, ,059 23,097 95,156 Stephen Lonie ,962 7,674 90, ,683 6,811 82,494 Ian Mainbridge ,962 7,674 90, ,683 6,811 82,494 Sarah Merrridew ,305 17,798 92, ,683 6,811 82,494 Sub Total , , , ,055 89, ,964 Page 43

16 Remuneration Report Salary & Fees $ Cash (1) (2) Bonus Non-Monetary Benefits $ Post Employment Superannuation $ Termination Benefits $ Share Based Total (1) (3) Payment $ Managing Director Melos Sulicich (4) John Gilbert (5) ,806 69,580 (16,787) 656,931 76,643 1,262, , ,000 7,011 33, ,976 1,075,169 Senior Executives David Mills (6) ,095 10,710 19,660 1, , ,452 23,220 21, ,797 Andrew Paynter (7) ,718 1,161 19,043 1, , ,661 40,258 27,582 1, ,501 Stephen Pender (6) ,357 7,682 19, , ,215 23,723 15, ,391 Aaron Pidgeon (6) ,130 12, , , ,240 33,350 7,570 25, ,913 Tim Rutherford ,993 5,768 24,137 34, , ,474 81,704 3,559 38,983 43, ,294 Tom Taylor (8) , ,172 32, , ,935 3,801 88,736 Natasha Whish Wilson ,866 14,448 18,297 25, , , ,433 1,872 39,066 9, ,901 Sub Total (9) ,298, , , , ,958 3,561, ,368, ,563 20, , , ,320 4,299,974 Total (9) ,938, , , , ,958 4,320, ,054, ,563 20, , , ,320 5,075,938 (1) The amounts disclosed for the remuneration of KMP are the cost to the Company for these components, as recorded by it in the financial year. These amounts have been calculated in accordance with relevant accounting policies and Accounting Standards. As these figures are based on accrual accounting and not a reflection of actual cash paid or shares vested, negative figures can result in the event of accrual reversals being recorded. (2) Approximately 25% of the maximum amount, in respect of the 2013/14 financial year STI offers, has been accrued on the basis that it is probable that the KMP will partially meet this proportion of their respective KPI s for the period. Any adjustments between the actual amounts to be paid, as determined by the GRC and Board, and the amounts accrued will be adjusted and disclosed in the Company s Remuneration Report and financial statements for the 2015 financial year. In addition, the disclosed amounts include satisfaction of prior year STI obligations. (3) Share based payment amounts have been calculated in accordance with the relevant accounting policy and Accounting Standard. The fair value of the share grant is calculated at the date of grant and is allocated to each reporting period evenly over the period from grant date to vesting date. This fair value will generally be different to the value of shares at the time they vest. The value disclosed is the portion of the fair value of the share grant allocated to this reporting period. These amounts represent share grants which will only vest to the KMP when certain performance and service criteria are met. In some circumstances all, or a portion, of the shares may never vest to the KMP. (4) Mr Sulicich became Managing Director and Chief Executive Officer on 1 July He has not received any compensation from the Company prior to this date. (5) Mr Gilbert retired as Managing Director and Chief Executive Officer on 31 March The termination payment of $656,931 included the pay-out of accrued leave entitlements of $56,331. (6) Mr Pidgeon, Mr Mills and Mr Pender s roles were added as KMP on 10 September 2012, and remuneration details are reflective of amounts paid from that date. (7) Mr Paynter s role was added as KMP on 6 July 2012, and remuneration details are reflective of amounts paid from that date. (8) Mr Taylor was appointed to the role on contract 11 April (9) Totals in respect of the year ended 30 June 2013 do not necessarily equal the sum of amounts disclosed for 2013 for individuals specified in this report, as different individuals were specified in the 2013 Remuneration Report. Page 44 MyState Limited 2014 Annual Report

17 8. Shareholdings of Key Management Personnel Details regarding the holdings by KMP and their related parties of ordinary shares in the Company are set out in the following table. Related parties include close members of the family of the KMP. It also includes entities under joint or several control or significant influence of the KMP and their close family members. No equity transactions with KMP, other than those arising as payment for compensation, have been entered into with the Company. Balance at commencement of financial year Granted as compensation (1) Net change other Balance at end of financial year Balance at end of financial year held by ELTIP trustee Non-Executive Directors Miles Hampton 600, ,000 Michael Vertigan AC (2) 25,000 25,000 Peter Armstrong 1,161 1,161 Robert Gordon Colin Hollingsworth 10,274 * 10,274 Stephen Lonie 50,000 50,000 Ian Mansbridge 170, ,000 Sarah Merridew 24,000 24,000 Managing Director and Chief Executive Officer Melos Sulicich John Gilbert (3) 58,226 69, , ,197 Executives David Mills 1, ,845 Andrew Paynter 1, ,509 Stephen Pender Aaron Pidgeon Tim Rutherford 7,404 14,579 21,983 21,983 Tom Taylor 10,000 10,000 Natasha Whish-Wilson 1,770 1,770 Total 961,920 84,980 1,046, ,180 (1) The shares granted as compensation to G J Gilbert and T Rutherford were pursuant to the ELTIP. The shares granted as compensation to Mr Paynter and Mr Mills were pursuant to the general employee share plan. (2) Dr Vertigan AC retired as Chairman and Director on 30 October The amount disclosed for the balance at the end of the year is as at 30 October (3) Mr Gilbert retired as Managing Director on 31 March The amount disclosed for the balance at the end of the year is as at 31 March Page 45

18 Remuneration Report 9. Loans to Key Management Personnel Details regarding the aggregate of loans made, guaranteed or secured by the Company to KMP and their related parties are set out in the following table. Details regarding loans outstanding with individual KMP and their related parties are also disclosed where the individual s aggregate loan balance exceeded $100,000 at any time in the period. Terms and conditions of the loans are either on normal commercial terms, applicable to other staff and customers, or at the fringe benefits tax rate designated by the Australian Tax Office annually and are in accordance with approved Board policy. No write-down of loan receivables or provisioning for doubtful receivables has been made or is required to be made in respect of these loans. Related parties include close members of the family of the KMP. It also includes entities under joint or several control or significant influence of the KMP and their close family members. Key Personnel Balance at commencement of financial year $ Interest charged $ Interest not charged $ Write off $ Balance at end of financial year $ Highest balance in period $ A R Paynter 273,213 15, , ,201 Total for key management personnel Number of KMP included in the total 273,213 15, , Contract terms and conditions The Managing Director and Chief Executive Officer and Executives are employed under individual employment agreements. Fixed Annual Remuneration (FAR) Incumbent Commenced in role Contract term (per year and subject to market based review mechanisms) Short Term Incentive (maximum) ELTIP (maximum) Termination Provisions (subject to shareholder approval in the event that they exceed the equivalent of 1 year FAR in total) Melos Sulicich 1 July Year term from 1 July 2014 Share Ownership $550,000 50% of FAR 50% of FAR The contract may be terminated by the Company with 26 weeks notice or payment in lieu of notice. The contract may be terminated by Mr Sulicich with 10 weeks notice. Pro-rata STI payment applied, at the full discretion of the Board, as at the date of termination. Pro-rata ELTIP allocation, made following the completion of the applicable performance periods. Required to purchase and maintain shares to the value of 50% of FAR by 30 June Page 46 MyState Limited 2014 Annual Report

19 Fixed Annual Remuneration (FAR) Incumbent Commenced in role Contract term (per year and subject to market based review mechanisms) Short Term Incentive (maximum) ELTIP (maximum) Termination Provisions (subject to shareholder approval in the event that they exceed the equivalent of 1 year FAR in total) John Gilbert 14 December Year term from 14 December 2009 plus a further 2 year term which was accepted $650,000 50% of FAR 50% of FAR Mr Gilbert retired as Managing Director on 31 March He received his entitlement under his contract at that time. These were: Payment in lieu of notice of 60 days FAR; A termination payment of 9 months FAR; A pro-rata STI payment: Accrued leave entitlements; The number of shares under current ELTIP offers, in accordance with the rules of that scheme. There are no further payments to be made to Mr Gilbert. David Mills 10 September 2012 Ongoing $200,000 Between 15% and 30% of FAR Between 15% and 30% of FAR upon invitation to participate The contract can be terminated by the Company upon provision of 1 months notice. Payment of the equivalent of 9 months FAR. Pro-rata STI payment applied as at the date of termination. Andrew Paynter 5 December December 2011 to 31 October 2014 $246,765 No entitlement No entitlement The contract can be terminated by the company upon provision of 4 weeks notice. Payment of up to 52 weeks dependent on years of service. Stephen Pender 10 September 2012 Ongoing $200,000 Between 15% and 30% of FAR Between 15% and 30% of FAR upon invitation to participate The contract can be terminated by the Company upon provision of 1 months notice. Payment of the equivalent of 9 months FAR. Pro-rata STI payment applied as at the date of termination. Aaron Pidgeon 10 September 2012 Ongoing $277,500 Between 15% and 30% of FAR Between 15% and 30% of FAR upon invitation to participate The contract can be terminated by the Company upon provision of 1 months notice. Payment of the equivalent of 9 months FAR. Pro-rata STI payment applied as at the date of termination. Page 47

20 Remuneration Report Fixed Annual Remuneration (FAR) Incumbent Commenced in role Contract term (per year and subject to market based review mechanisms) Short Term Incentive (maximum) ELTIP (maximum) Termination Provisions (subject to shareholder approval in the event that they exceed the equivalent of 1 year FAR in total) Tim Rutherford 11 January 2010 Ongoing $400,875 Between 15% and 30% of FAR Between 15% and 30% of FAR upon invitation to participate The contract can be terminated by the Company upon provision of 1 months notice. Payment of the equivalent of 9 months FAR. Pro-rata STI payment applied as at the date of termination. Pro-rata ELTIP allocation, made following the completion of the applicable performance periods. Tom Taylor 11 April 2013 The contract has been progressively renewed and now expires on 30 September 2014 $384,520 FAR will be applied pro rata for the contract period Due to the shorter term nature of Mr Taylor s contract, no entitlement to the ELTIP is provided. However, an enhanced STI entitlement, of 58.3 % of FAR for the contract period is provided. The contract can be terminated by the Company upon provision of 1 months notice. Payment of the equivalent to the balance of the FAR. Pro-rata STI payment applied as at the date of termination. Natasha Whish- Wilson 27 October 2011 Ongoing $332,687 Between 15% and 30% of FAR Between 15% and 30% of FAR upon invitation to participate The contract can be terminated by the Company upon provision of 1 months notice. Payment of the equivalent of 9 months FAR. Pro-rata STI payment applied as at the date of termination. Pro-rata ELTIP allocation, made following the completion of the applicable performance periods. Page 48 MyState Limited 2014 Annual Report

21 Directors Report Signed in accordance with a resolution of the Directors. M L Hampton Chairman M A Sulicich Managing Director Hobart Dated this 21 August

22 Income Statement for the financial year ended 30 June 2014 Consolidated Company Notes 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 Interest income 3 177, , Interest expense 3 (93,330) (118,977) - - Net interest margin 84,389 85, Other income 4 34,867 36,865 31,591 31,761 Other expenses 5 (76,883) (80,375) (7,392) (7,415) Profit before bad and doubtful debts and income tax 42,373 41,971 24,419 24,373 Less bad and doubtful debts net of recoveries 15 (b) (852) (1,628) - - Profit before income tax expense 6 41,521 40,343 24,419 24,373 Income tax expense / (benefit) 7 11,950 11,886 4 (2) Net profit after income tax 29,571 28,457 24,415 24,375 Basic earnings per share (cents per share) Diluted earnings per share (cents per share) The accompanying notes form part of these financial statements. 1

23 Statement of Comprehensive Income for the financial year ended 30 June 2014 Consolidated Company 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 Net profit after income tax 29,571 28,457 24,415 24,375 Other comprehensive income/(expense): Items that may be reclassified subsequently to profit or loss Cashflow hedge movements 1,280 1, Net fair value (losses) / gains on available for sale financial assets (593) Income tax effect (206) (567) - - Total other comprehensive income for the period 481 1, Total comprehensive income for the period 30,052 29,779 24,415 24,375 Total comprehensive income for the period is attributable to: Ordinary equity holders of MyState Limited Total comprehensive income for the period 30,052 29,779 24,415 24,375 30,052 29,779 24,415 24,375 The accompanying notes form part of these financial statements. 2

24 Statement of Financial Position as at 30 June 2014 Consolidated Company Notes 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 ASSETS Cash and cash equivalents 12 57,958 66,835 2,807 1,605 Available for sale financial assets , , Receivables 14 22,583 25,538 4,288 1,592 Loans at amortised cost 15 3,050,873 3,037, Other investments 16 5,020 5, , ,511 Assets classified as held for sale 17 2, Property, plant and equipment 18 13,496 17, Tax assets 8 4,034 6, Intangible assets and goodwill 19 78,117 74, TOTAL ASSETS 3,555,822 3,629, , ,584 LIABILITIES Deposits 20 2,225,690 2,310, Interest bearing loans and borrowings , , Payables and other liabilities 22 43,764 47,373 1,236 1,691 Derivatives 23-2, Tax liabilities 9 6,183 2,957 4, Provisions 24 5,594 5, TOTAL LIABILITIES 3,270,173 3,350,032 6,096 2,597 NET ASSETS 285, , , ,987 EQUITY Share capital , , , ,170 Retained earnings , , Asset revaluation reserve 28 2,340 2, Employee equity benefits reserve Hedging reserve 28 - (896) - - Net unrealised gains reserve 28 (65) TOTAL EQUITY 285, , , ,987 The accompanying notes form part of these financial statements. 3

25 Statement of Cash Flows for the financial year ended 30 June 2014 Consolidated Company Notes 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 Cash flows from operating activities Interest received Interest paid Fees and commissions received Other non-interest income received Payments to suppliers and employees Dividends received Income tax paid Net income tax contributions received from subsidiaries Net cash flows from/(used in) operating activities 178, , (96,848) (128,996) - 33,688 37, ,528 1,429 3,008 - (72,990) (79,650) (7,437) (2,040) (6,747) (10,638) (3,293) (10,517) - - 7,340 8, (c) 39,060 26,300 (21) (3,032) Cash flows from investing activities Net (decrease)/ increase in loans to customers Net movement in amounts due from other financial institutions Dividend received Purchase of intangible assets Disposal of property, plant and equipment Purchase of property, plant and equipment Net cash flows from/(used in) investing activities (12,627) 17, ,926 (28,025) ,419 24,373 (5,325) (4,628) , (1,550) (4,605) ,794 (15,865) 24,419 24,373 Cash flows from financing activities Net (decrease) / increase in deposits Net decrease in loans to related entities Net increase/ (decrease) in amounts due to other financial institutions Employee share issue Dividends paid Net cash flows used in financing activities (84,608) 86, ,132 7,989 (111,108) (24,417) (24,378) (24,417) (24,378) (100,731) (49,070) (23,196) (21,128) Net (decrease)/increase in cash held Cash at beginning of financial year Closing cash carried forward (8,877) (38,635) 1, , ,470 1,605 1, (a) 57,958 66,835 2,807 1,605 The accompanying notes form part of these financial statements.

26 Statement of Changes in Equity for the financial year ended 30 June 2014 Consolidated Share Capital Retained Earnings Attributable to equity holders of the company Asset Revaluation Reserve Employee Equity Benefits Reserve Hedging Reserve Net Unrealised Gains Reserve Total $ '000 $ '000 $ '000 $ '000 $ '000 $ '000 $ '000 At 1 July , ,094 2, (2,004) ,877 Net profit after income tax - 28, ,457 Other comprehensive income net of tax , ,323 Total comprehensive income for the period - 28, , ,780 Equity issued under employee share scheme Share based payment expense recognised Equity issued under Executive long term incentive plan (338) Dividends paid - (24,378) (24,378) At 30 June , ,173 2, (896) ,709 At 1 July , ,173 2, (896) ,709 Net profit after income tax - 29, ,571 Other comprehensive income/(expense) (net of tax) (415) 481 Total comprehensive income for the period - 29, (415) 30,052 Equity issued under employee share scheme Share based payment expense recognised Equity issued under Executive long term incentive plan (325) - (114) Dividends paid - (24,417) (24,417) At 30 June , ,327 2, (65) 285,649 The accompanying notes form part of these financial statements. 5

27 Statement of Changes in Equity (continued) for the financial year ended 30 June 2014 Attributable to equity holders of the company Employee Equity Benefit Net Unrealised Gains Share Capital Retained Earnings Asset Revaluation Reserve Reserve Hedging Reserve Reserve Total Company $ '000 $ '000 $ '000 $ '000 $ '000 $ '000 $ '000 At 1 July , ,560 Net profit after income tax - 24, ,375 Total comprehensive income for the period - 24, ,375 Equity issued under employee share scheme Share based payment expense recognised Equity issued under Executive long term incentive plan (338) Dividends paid - (24,378) (24,378) At 30 June , ,987 At 1 July , ,987 Net profit after income tax - 24, ,415 Total comprehensive income for the period - 24, ,415 Equity issued under employee share scheme Share based payment expense recognised Equity issued under Executive long term incentive plan (325) - - (114) Dividends paid - (24,417) (24,417) At 30 June , ,290 The accompanying notes form part of these financial statements. 6

28 1 Summary of significant accounting policies MyState Limited (a) Basis of accounting The consolidated financial report is a general purpose financial report which has been prepared in accordance with the requirements of the Corporations Act 2001, including Australian Accounting Standards. The financial report has been presented in Australian dollars. This financial report is for MyState Limited and the entities it controlled at the end of, or during the year ended 30 June The comparative information disclosed in the Income Statement, Statement of Comprehensive Income, Statement of Changes in Equity and the Statement of Cash Flows is for the corresponding year to 30 June The consolidated entity is a kind referred to in ASIC Class order 98/100 and in accordance with this Class Order, amounts presented in the financial report are rounded off to the nearest thousand unless otherwise indicated. Throughout these notes to the financial statements, the following terms are used with the corresponding meaning: the "Company" the "consolidated entity" MyState Limited; MyState Limited and the entities it controlled at the end of, or during the period; "MSF Group" MyState Financial Limited and the entities it controlled at the end of, or during the period; "MSF" MyState Financial Limited; "TPT" Tasmanian Perpetual Trustees Limited; "ROK Group" The Rock Building Society Limited and the entities it controlled at the end of, or during the period; "ROK" The Rock Building Society Limited; the "period" the year ended 30 June 2014; the "comparative period" the year ended 30 June 2013; "APRA" the Australian Prudential Regulation Authority; "ADI" "ASIC" "AFSL" Authorised deposit-taking institution; Australian Securities and Investments Commission; and Australian financial services licence. For the purpose of preparing the consolidated financial statements, the Company is a for-profit entity. (b) Historical cost convention The financial report has been prepared on a historical cost basis, with the exception of certain assets and liabilities as outlined in these accounting policies. (c) Compliance with IFRS as issued by the IASB The financial report complies with Australian Accounting Standards, which include Australian Equivalents to International Financial Reporting Standards. The consolidated financial report and the financial report of the Company comply with International Financial Report Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board (IASB). 7

29 1 Summary of significant accounting policies (continued) (d) New and revised accounting standards, amendments and interpretations The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application for reporting periods beginning on or after 1 July The adoption of these accounting standards have not resulted in any significant changes to the financial statements: AASB 10 Consolidated Financial Statements (and AASB 127 (2011) Separate Financial Statements). AASB 11 Joint Arrangements. AASB 128 (2011) Investments in Associates and Joint Ventures. AASB 12 Disclosure of Interests in Other Entities. AASB 13 Fair Value Measurements. AASB 119 (2011) Employee Benefits. AASB Amendments to Australian Accounting Standards Disclosures Offsetting Financial Assets and Financial Liabilities. AASB Amendments to Australian Accounting Standards arising from Annual Improvements Cycle. AASB Amendments to Australian Accounting Standards Mandatory Effective Date of AASB 9 and Transition Disclosures. AASB Amendment to AASB 1048 arising from the Withdrawal of Australian Interpretation AASB Amendments to Australian Accounting Standards Transition Guidance and Other AASB 1048 (2013) Interpretation of Standards. AASB CF Amendments to the Australian Conceptual Framework. AASB (part A) Amendments to Australian Accounting Standards Conceptual Framework. The following standard, amendments to standard and interpretation has been identified as an accounting standard which may impact the entity in the period of initial application. It is available for early adoption at 30 June 2014, but has not been applied in preparing this financial report. The consolidated entity will adopt this standard on its effective date. It is not expected that adoption of this standard will have a significant impact on the presentation of the Group's financial statements: AASB 9 Financial Instruments Classification & Measurement. The principle accounting policies adopted in the preparation of the Financial report are set out in the following section (e) Principles of consolidation Basis of consolidation The consolidated financial statements comprise the financial statements of MyState Limited and its subsidiaries as at 30 June each year. Subsidiaries are all those entities (including special purpose entities) over which the Company has the power to govern directly or indirectly decision making in relation to financial and operating policies, so as to require that entity to conform to the Company's objectives. Information from the financial statements of subsidiaries is included from the date the parent company obtains control until such time as control ceases. Where there is loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting period during which the parent had control. Subsidiary acquisitions are accounted for using the purchase method of accounting. The financial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. Impairment of subsidiaries Investments in subsidiaries are tested annually for impairment or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognised for the amount by which the investments carrying amount exceeds its recoverable amount (which is the higher of fair value less costs to sell and value in use). At each balance sheet date, the investments in subsidiaries that have been impaired are reviewed for possible reversal of the impairment. 8

30 1 Summary of significant accounting policies (continued) (e) Principles of consolidation (continued) Securitisations Securitised positions are held through a number of Special Purpose Entities (SPE's). These entities are joint operations as the parties to them have rights to the assets and obligations for the liabilities arising from the arrangement in proportion to the value of their contribution. The special purpose vehicles are accounted for by proportional consolidation. (f) Critical accounting estimates and significant judgments The preparation of the financial report in conformity with Australian Accounting Standards requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the accounting policies. The notes to the financial statements set out areas involving a higher degree of judgment or complexity, or areas where assumptions are significant to the financial report such as: Fair value of financial instruments (see note 1(i)); Impairment losses on loans and advances and held for sale investments (see note 1(s)); Recoverability of deferred tax assets (see note 1(u)); and Impairment losses on goodwill (see notes 1(m) and 19). Estimates and judgments are continually evaluated and are based on historical experience and other factors, including reasonable expectations of future events. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods. Management considers that the estimates used in preparing the financial report are reasonable. Actual results in the future may differ from those reported. (g) Cash and cash equivalents Cash and cash equivalents in the Statement of Financial Position comprise cash at bank and in hand and shortterm deposits with an original maturity of three months or less. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined, net of outstanding bank overdrafts. Cash flows arising from deposits, share capital, investments, loans to subsidiaries and investments in associates are presented on a net basis in the Statement of Cash Flows. (h) Receivables Receivables from related parties are recognised and carried at the nominal amount due. Interest is taken up as income on an accrual basis. Other receivables are carried at the nominal amount due and are non-interest bearing. An estimate of doubtful debts is made when the collection of the full amount is no longer probable. Bad debts are written-off when identified. (i) Investments All investments are initially recognised at cost at trade date, being the fair value of the consideration given and including acquisition charges associated with the investment. Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the consolidated entity has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. Other long-term investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any discount or premium on acquisition, over the period to maturity. For investments carried at amortised cost, gains and losses are recognised in income when the investment is derecognised or impaired, as well as through the amortisation process. Fair value is calculated in accordance with the principles outlined in note 33. 9

31 1 Summary of significant accounting policies (continued) (i) Investments (continued) Available-for-sale financial assets Available-for-sale investments are those non-derivative financial assets that are designated as available-for-sale or are not otherwise designated. After initial recognition, available-for-sale securities are measured at fair value, with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognised in profit or loss. Interest income from available-for-sale investments is recognised in profit or loss using the effective interest method. Held to maturity investments Held to maturity investments are non-derivative assets with fixed or determinable payments and fixed maturity that the consolidated entity has a positive intent and ability to hold to maturity, and which are not designated as available for sale. These investments are carried at amortised cost using the effective interest method. Any sale or reclassification of a significant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale, and prevent the consolidated entity from classifying investment securities as held-to-maturity for the current and the following two financial years. (j) Recoverable amount of assets At each reporting date, the consolidated entity assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the consolidated entity makes a formal estimate of the recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. (k) Property, plant and equipment Land and building Land and buildings are measured at fair value less accumulated depreciation. Property Freehold land and buildings are measured at their fair value, being the amount for which an asset could be exchanged between knowledgeable willing parties in an arm s length transaction, less accumulated depreciation. Plant and equipment Plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Impairment The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. If such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cashgenerating units are written down to their recoverable amount. The recoverable amount of plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognised in the Income Statement. 10

32 1 Summary of significant accounting policies (continued) (k) Property, plant and equipment (continued) Revaluations Following initial recognition at cost, land and buildings are carried at a revalued amount, being their fair value at the date of the revaluation less any subsequent accumulated depreciation on buildings and accumulated impairment losses. Fair value, is determined by reference to market-based evidence, which is the amount for which the assets could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm's length transaction as at valuation date. Any revaluation surplus is credited to the asset revaluation reserve included in the equity section of the Statement of Financial Position, unless it reverses a revaluation decrease of the same asset previously recognised in the Income Statement. Any revaluation deficit is recognised in the Income Statement unless it directly offsets a previous surplus of the same asset in the asset revaluation reserve. Any accumulated depreciation as at revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Independent valuations are performed with sufficient regularity to ensure the carrying amount does not differ materially from the asset's fair value at the Statement of Financial Position date. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the Income Statement in the year the item is derecognised. Depreciation The consolidated entity adopts the straight line method of depreciating property, plant and equipment, and intangible assets, to depreciate these assets over their estimated useful lives commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired expected term of the lease or the estimated useful life of the improvements. Estimated useful lives are: Buildings 2.50% 2.50% Office furniture and fittings 15.00% % 15.00% % Building fit- 6.67% % 6.67% % Office equipment 25.00% 25.00% Computer hardware 33.33% 33.33% (l) Leases Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement, to reflect the risks and benefits incidental to ownership. Operating leases The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as an expense on a straight-line basis in the Income Statement over the life of the lease. The cost of improvements to or on leasehold property is capitalised, disclosed as leasehold improvements, and amortised over the unexpired period of the lease or the estimated useful life of the improvements, whichever is the shorter. (m) Goodwill Goodwill on acquisition is initially measured at cost, being the excess of the cost of the business combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortised. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. At the acquisition date, any goodwill acquired is allocated to each of the cash-generating units expected to benefit from the combination's synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Impairment is reviewed in accordance with the principles outlined in note

33 1 Summary of significant accounting policies (continued) (n) Intangible assets Acquired both separately and from a business combination Intangible assets acquired separately are capitalised at cost and from a business combination are capitalised at fair value as at the date of acquisition. Following initial recognition, the cost model is applied to the class of intangible assets. The useful lives of these intangible assets are assessed to be either finite or infinite. Where amortisation is charged on assets with finite lives, this expense is taken to the Income Statement. Certain costs directly incurred in acquiring and developing software are capitalised and amortised over the estimated useful life. Other intangible assets created within the business are not capitalised and expenditure is charged against profits in the year in which the expenditure is incurred. Intangible assets are tested for impairment where an indicator of impairment exists and, in the case of indefinite life intangibles, annually, either individually or at the cash-generating unit level. Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis. Software licences Items of computer software which are not integral to the computer hardware are classified as intangible assets. Computer software is amortised on a straight line basis over the expected useful life of the software. (o) Payables and other liabilities Liabilities for trade creditors and other amounts are carried at cost, which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the consolidated entity. The terms and conditions for creditors and other liabilities are payable between 7 and 30 days. Payables to related parties are carried at the principal amount. Interest, when charged by the lender, is recognised as an expense on an accrual basis. The terms and conditions for payables to related parties are payable within 30 days. The consolidated entity classifies financial instruments as financial liabilities or equity instruments, in accordance with the substance of the contractual terms of the instrument. (p) Employee benefits Liabilities for salaries, wages and annual leave are recognised in respect of the employee's service up to the reporting date. Where settlement is expected to occur within twelve months of the reporting date, the liabilities are measured at their nominal amounts based on the remuneration rates which are expected to be paid when the liability is settled. Where settlement is expected to occur later than twelve months from reporting date, the liabilities are measured at the present value of payments which are expected to be paid when the liability is settled. Contributions are made by the consolidated entity to employee superannuation funds and are charged as expenses when incurred. (q) Interest recognition Interest on customers' loans is calculated daily on the outstanding balance and charged monthly in arrears. Future interest on long-term loans is not accounted for in advance. Interest expense on deposits is calculated on the daily balance. All borrowings are measured at the principal amount. Interest on borrowings is charged as an expense as it accrues. (r) Provisions Provisions are recognised when the consolidated entity has a legal, equitable or constructive obligation to make a future sacrifice of economic benefits to other entities as a result of past transactions or other past events and it is probable that a future sacrifice of economic benefits will be required and a reliable estimate can be made of the amount of the obligation. If the effect is material, a provision is determined by discounting the expected future cash flows (adjusted for expected future risks) required to settle the obligation at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability most closely matching the expected future payments. 12

34 1 Summary of significant accounting policies (continued) (s) Loans and advances Loans and advances are recognised at recoverable amount, after assessing required provisions for impairment. Impairment of a loan is recognised when there is reasonable doubt that not all the principal and interest can be collected in accordance with the terms of the loan agreement. Impairment is assessed by specific identification in relation to individual loans and by estimation of expected losses in relation to loan portfolios where specific identification is impracticable. The loan interest is calculated on the daily balance and is charged in arrears to a borrower's account on the last day of each month. Bad debts are written off when identified. If a provision for impairment has previously been recognised in relation to a loan, write-offs for bad debts are made against the provision. If no provision for impairment has previously been recognised, write-offs for bad debts are recognised as expenses in the Income Statement. All loans and advances are reviewed and graded according to the anticipated level of credit risk. The classification adopted is described as follows: Non-accrual loans, being loans classified as categories two, three and four under the APRA Prudential Standard APS Credit Quality, where statutory provisioning is required. Interest on these loans is not recognised as revenue. There is reasonable doubt about the ultimate collectability of principal and interest, and hence provisions for impairment are recognised. Restructured loans, consisting of all loans for which the original contractual terms have been revised to provide for concessions of interest, principal or repayment. Loans with revised terms are included in nonaccrual loans when impairment provisions are required. Other real estate and assets owned are assets acquired in full or partial settlement of a loan or similar facility through enforcement of security arrangements. Past due loans, consisting of loans classified as category one under APS 220 where payments of principal or interest are at least 90 days in arrears but the loans are well secured. (t) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the consolidated entity and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Interest Loan interest income is recognised as interest accrues, using the effective interest rate method. The effective interest rate method uses the effective interest rate, which is the rate that exactly discounts the estimated future cash receipts over the expected life of the loan to the net carrying amount of the loan. When a loan is classified as impaired, the consolidated entity ceases to recognise interest and other income earned but not yet received. Loan interest income is not charged when the consolidated entity is informed that a borrower has deceased or, generally, if a loan has been transferred to a debt collection agency or a judgement has been obtained. No interest is charged on loans where repayments are in arrears and the prospects of a contribution from the borrower are minimal. However, accrued interest may be recovered as part of the recovery of the debt. Fees Control of a right to receive consideration for the provision of fees has been attained. Commission Control of a right to receive consideration for the provision of funds placement, insurance policy sales or participation in card activities has been attained. Corpus administration fees Revenue is recognised progressively as the work is performed during the administration of the estates. 13

35 1 Summary of significant accounting policies (continued) (t) Revenue recognition (continued) Management fee revenue Trustee Company revenue is recognised as it accrues and is calculated in accordance within the meaning of Chapter 5D of the Corporations Act 2001 and the Funds' Constitutions. Distributions from managed fund investments Revenue is recognised when the right to receive the distribution is obtained. (u) Taxes Income taxes Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantially enacted by the Statement of Financial Position date. Deferred income tax is provided on all temporary differences at the Statement of Financial Position date between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences except: Where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and When the taxable temporary differences associated with the investments in subsidiaries and the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax assets and unused tax losses can be utilised except: When the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affect neither the accounting profit nor the taxable profit and loss; and When the deductible temporary differences are associated with investments in subsidiaries, in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each Statement of Financial Position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each Statement of Financial Position date and are recognised to the extent that it has become probable that the future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the Statement of Financial Position date. 14

36 1 Summary of significant accounting policies (continued) (u) Taxes (continued) Income taxes (continued) Income taxes relating to items recognised directly in equity are recognised in equity and not in the Income Statement. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxable authority. The Company and consolidated entity exercise judgement in determining whether deferred tax assets, particularly in relation to tax losses, are probable of recovery. Factors considered include the ability to offset tax losses within the tax consolidated group, the nature of the tax loss, the length of time that tax losses are eligible for carry forward to offset against future taxable profits and whether future taxable profits are expected to be sufficient to allow recovery of deferred tax assets. The consolidated entity undertakes transactions in the ordinary course of business where the income tax treatment requires the exercise of judgement. The consolidated entity estimates its tax liability based on its understanding of the tax law. Tax consolidation The consolidated entity s tax liabilities are determined according to tax consolidation legislation. The Company and its wholly owned subsidiaries, TPT, MSF, Connect Asset Management Proprietary Limited and ROK form a tax consolidated group. The head company is MyState Limited. Members of the group have entered into a tax sharing agreement that provides for the allocation of income tax The Company and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Company has applied the separate tax payer within group approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the Company also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the group. Details of the tax funding agreement are disclosed in note 7. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. (v) Goods and Services Tax Revenue, expenses and assets are recognised net of the amount of Goods and Services Tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset, or as part of the expense. Receivables and payables in the Statement of Financial Position are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Statement of Financial Position. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. 15

37 1 Summary of significant accounting policies (continued) (w) Derecognition of financial instruments The derecognition of a financial instrument takes place when the consolidated entity no longer controls the contractual rights that comprise the financial instrument, which is normally the case when the instrument is sold, or all of the cash flows attributable to the instrument are passed through to an independent third party. (x) Derivative instruments and hedging The consolidated entity is exposed to changes in interest rates. The only derivative instruments currently entered into by the consolidated entity are interest rate swaps, which are used to mitigate the risks arising from the exposure to changes in interest rates. These derivative instruments are principally used for the risk management of existing financial liabilities. All derivatives, including those derivatives used for Statement of Financial Position hedging purposes, are recognised on the Statement of Financial Position and are disclosed as an asset where they have a positive fair value at balance date, or as a liability where the fair value at balance date is negative. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and subsequently remeasured to their fair value. Fair values are obtained from quoted market prices in active markets. Movements in the carrying amounts of derivatives are recognised in the Income Statement, unless the derivative meets the requirements for hedge accounting. The consolidated entity documents the relationship between the hedging instruments and hedged items at inception of the transaction, as well as its risk management objective and strategy for undertaking various hedge transactions. The consolidated entity also documents its assessment of whether the derivatives used in hedging transactions have been or will continue to be, highly effective in offsetting changes in the fair values or cash flows of hedged items. This assessment is carried out both at inception and on a monthly basis. Accounting for hedges Cash flow hedges When a derivative is designated as a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecast transaction that could affect the Income Statement, the effective portion of the change in the fair value of the derivative is recognised in other comprehensive income. The amount recognised in other comprehensive income is reclassified to the Income Statement as a reclassification adjustment in the same period as the hedged cash flows affect the Income Statement, and, in the same line item in the Statement of Comprehensive Income, as the hedged item. Any ineffective portion of the change in the fair value of a derivative is recognised immediately in the Income Statement. Derivatives that do not qualify for hedge accounting If a derivative expires or is sold, terminated, or exercised, or no longer meets the criteria for cash flow hedge accounting, or the designation is revoked, then hedge accounting is discontinued and the amount recognised in other comprehensive income remains in other comprehensive income until the forecast transaction affects the Income Statement. If the forecast transaction is no longer expected to occur, it is reclassified to the Income Statement as a reclassification adjustment. When a derivative is not held for trading, and is not designated in a qualifying relationship, all changes in its fair value are recognised immediately in the Income Statement, as a component of net income from other financial instruments carried at fair value. At the inception of a hedging transaction, the relationship between the hedging instruments and the hedged items, as well as the risk management objective and strategy for undertaking the transaction, are documented. Assessments, both at hedge inception and on an ongoing basis, of whether the derivatives used in hedging transactions have been, and will continue to be, highly effective in offsetting changes in the cash flows of hedged items are also documented. 16

38 1 Summary of significant accounting policies (continued) (y) Comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. (z) Segment information Operating segments are identified on the basis of internal reports to senior management about components of the consolidated entity that are regularly reviewed by senior management who have been identified as the chief operating decision makers, in order to allocate resources to the segment and to assess its performance. Information reported to the senior management for the purposes of resource allocation and assessment of performance is specifically focused on core products and services offered, comprising reportable segments as disclosed in note 11. Information about products and services and geographical segments are based on the financial information used to produce the consolidated entity s financial statements. (aa) Earnings per share Basic earnings per share is calculated by dividing the consolidated entity s profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the financial year. Diluted earnings per share is calculated by dividing the consolidated entity s profit attributable to ordinary equity holders by the weighted average number of ordinary shares that would be issued on the exchange of all the dilutive potential ordinary shares into ordinary shares. (ab) Share-based payment transactions The consolidated entity provides benefits to its employees in the form of share-based payment transactions, whereby employees render services in exchange for shares ( equity-settled transactions ). The cost of these equitysettled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. In valuing equity-settled transactions, no account is taken of any vesting conditions, other than (if applicable); non-vesting conditions that do not determine whether the consolidated entity receives the services that entitle the employees to receive payment in equity or cash (non-vesting conditions); or, conditions that are linked to the price of the shares of the Company (market conditions). The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the shares ( vesting date ). 2 Change in Accounting Policies There have been no changes in accounting policies which have been applied in this period. 17

39 3 Interest income and interest expense Consolidated Company 30 June June June June 2013 $' 000 $' 000 $' 000 $' 000 Interest income Interest on Loans, other than commercial 160, , Interest on Deposits with other financial institutions 13,839 18, Interest on Commercial loans 3,760 3, Total interest income 177, , Interest expense Interest on deposits 63,806 80, Interest due to other financial institutions 29,524 38, Total interest expense 93, , Other income Income from operating activities Banking operating income Loan fee income 3,325 2, Transaction fees 8,122 9, Commissions 4,695 5, Dividends from other corporations Other income 771 1, Total banking operating income 17,527 19, Wealth Management operating income Funds management income 9,188 8, Fees and commissions 8,150 8, Total Wealth Management operating income 17,338 17, Other operating income Dividends received from subsidiaries ,419 24,373 Intercompany management fees - - 7,172 7,233 Profit / (loss) on sale of assets 2 (265) - - Other income Total Other operating income 2 (265) 31,591 31,760 Income from other operating activities Total other income 34,867 36,865 31,591 31,760 18

40 Consolidated Company 30 June June June June 2013 $' 000 $' 000 $' 000 $' Expenses Personnel costs 35,659 38,489 3,607 4,007 Marketing costs 3,171 3, Governance costs 2,807 2,875 2,093 2,130 Technology costs 8,196 9, Occupancy costs 7,619 7, Administration costs 19,431 18,527 1,458 1,114 Total expenses 76,883 80,375 7,392 7,414 6 Profit before income tax expense MyState Limited Profit before income tax expense includes the following specific expenses: (a) Expenses Termination payments 370 2, Operating lease payments 3,507 2, Supervision levy Amounts received or due and receivable by the external auditors Wise, Lord & Ferguson for: - Audit of the financial statements of the consolidated entities Other non-external audit services Tax compliance services Assurance related services Audit of loans sold into the securitisation program Other services Total Other non-external audit services

41 7 Income tax Consolidated Company 30 June June June June 2013 $' 000 $' 000 $' 000 $' 000 Income tax expense (benefit) The major components of income tax expense /(benefit) are: Current tax expense 11,592 9,281 (6) (592) Deferred tax expense - movement in deferred tax assets before losses 979 2, movement in deferred tax liabilities (319) 472 (11) (3) Adjustments for current tax of prior years (868) (183) - (5) Adjustments for deferred tax of prior years (9) 11,950 11,886 4 (2) Reconciliation of income tax expense to prima facie tax payable Accounting profit/ (loss) before tax 41,521 40,343 24,419 24,373 Prima facie tax at statutory income tax rate of 30% (2013: 30%) 12,456 12,103 7,326 7,312 Tax effect of amounts which are non assessable/(non deductible) in calculating taxable income: - Adjustments for current tax of prior years (302) (183) Non taxable dividends received (184) (196) (7,326) (7,312) - Other adjustments (20) Adjustments for deferred tax of prior years (14) Income tax expense/(benefit) 11,950 11,886 4 (2) Weighted average effective tax rates 29% 29% 0% 0% Company 30 June June 2013 Tax consolidation contributions $' 000 $' 000 MyState Limited has recognised the following amounts as tax consolidation contribution adjustments: Total increase to tax payable of the Company 11,598 9,868 Total increase to intercompany assets of the Company 11,598 9,868 20

42 Consolidated Company 30 June June June June 2013 $' 000 $' 000 $' 000 $' Deferred tax assets The balance comprises temporary differences attributable to: Amounts recognised in the Income Statement Other Provision for doubtful debts Depreciation of property, plant & equipment - 2, Employee provisions 1,678 1, Creditors & accruals Carried forward losses Other costs to be amortised for tax purposes 342 1,312 (131) - 3,976 6, Amounts recognised directly in Equity Hedging liability - (476) - - Other ,034 6, Movements Opening balance 6,216 8, ,410 Reclassification deferred tax (694) Charged to Income Statement (979) (2,230) (154) (607) Credited/(charged) to Equity 58 (413) Adjustments for deferred tax of prior years (567) (86) - 9 Closing balance 4,034 6,

43 9 Tax liabilities Consolidated Company 30 June June June June 2013 $' 000 $' 000 $' 000 $' 000 The deferred tax balance comprises temporary differences attributable to: Amounts recognised in the Income Statement Other Prepaid expenses Intangible assets Depreciation of property, plant & equipment 843 1, ,354 2, Amounts recognised directly in Equity Land and buildings Other 194 (92) (92) - - 1,548 2, Movements Opening balance 2,368 1, Reclassification deferred tax asset (694) (Charged) / credited to income statement (319) 472 (11) (3) Credited / (charged) to equity Adjustments for deferred tax of prior years (1) Deferred tax closing balance 1,548 2, Current tax liabilities Current tax payable 4, , Total tax liabilities 6,183 2,957 4,

44 10 Earnings per share MyState Limited Consolidated 30 June June 2013 cents cents Basic earnings per share Diluted earnings per share The following reflects the income and share data used in the calculation of basic and diluted earnings per share: $' 000 $' 000 Net Profit 29,571 28,457 Number Number Weighted average number of ordinary shares used in calculating basic and diluted earnings per share: 87,199,366 87,074, Segment financial information For internal reporting purposes, the consolidated entity is divided into two operating divisions and a corporate cost centre. Performance is measured based on profit after income tax of each segment and is determined in accordance with the consolidated entity's accounting policies. The banking division consists of two broad based financial institutions operating predominantly in Tasmania and Queensland. Its product offerings include: lending, encompassing home loans, personal, overdraft, line of credit and commercial products; transactional savings accounts and fixed term deposits; and, insurance products. It delivers these products and services through its branch network, as well as through the mortgage broker channel. The banking division is conducted by the MSF Group and the ROK Group. Both MSF and ROK are ADIs, authorised by APRA. The wealth management division is a provider of funds management, financial planning and trustee services. It operates predominantly within Tasmania. It holds over $1 billion in funds under management on behalf of personal, business and wholesale investors as the responsible entity for 10 managed investment schemes. The wealth management division is conducted by TPT. TPT is a trustee company licensed within the meaning of Chapter 5D of the Corporations Act 2001 and is the only private trustee company with significant operations in Tasmania. TPT holds an AFSL issued by ASIC. The corporate cost centre is responsible for the governance of the consolidated entity. The corporate cost centre charges the operating divisions on a cost recovery basis for costs it has incurred. 23

45 11 Segment financial information (continued) Year ended 30 June 2014 Banking Group Wealth Management Group Corporate and consolidation adjustment Consolidated Total $' 000 $' 000 $' 000 $' 000 Interest income 177, ,719 Interest expense 93, ,330 Other Income Loan fee income 3, ,325 Management fees - 9,188-9,188 Estate administration - 2,414-2,414 Other fees 8,122 1,283-9,405 Commissions 4,695 4,177-8,872 Dividends and distributions Other revenue 1, (573) 1,049 Total other Income 18,091 17,349 (573) 34,867 Material expenditures Termination payments Loss on sale of equipment Contractually committed lease payments 3, (381) 3,507 Bad and doubtful debts net of recoveries Depreciation and amortisation 4, ,796 Income tax expense 9,952 1, ,950 Segment net profit after income tax 25,044 4,590 (63) 29,571 Segment assets 3,477,036 29,661 49,125 3,555,822 Intangibles - finite life 12, ,139 Intangibles - indefinite life 2,091 16,219 47,668 65,978 Capital expenditure - Property, plant and equipment 1, ,550 Capital expenditure - Intangible assets and goodwill 5, ,325 Segment Liabilities 3,267,211 3,280 (318) 3,270,173 24

46 11 Segment financial information (continued) Year ended 30 June 2013 Banking Group Wealth Management Group Corporate and consolidation adjustment Consolidated Total $' 000 $' 000 $' 000 $' 000 Interest revenue 203, ,458 Interest expense 118, ,977 Other Income Loan fee income 2, ,986 Management fees - 8,950-8,950 Estate administration - 2,799-2,799 Other fees 9, ,930 Commissions 5,592 4,502-10,094 Dividends and distributions Other revenue 1, (606) 1,512 Total other Income 20,040 17,431 (606) 36,865 Material expenditures Termination payments 1, ,214 Contractually committed lease payments 2, (381) 2,609 Bad and doubtful debts net of recoveries 1, ,628 Depreciation and amortisation 4, ,630 Income Tax 10,599 1,349 (62) 11,886 Segment net profit after income tax 25,260 3, ,457 Segment assets 3,551,973 30,041 47,727 3,629,741 Intangibles - finite life 8, ,707 Intangibles - indefinite life 2,091 16,219 47,668 65,978 Capital expenditure - Property, plant and equipment 3,484 1,121-4,605 Capital expenditure - Intangible assets and goodwill 4, ,628 Segment Liabilities 3,348,275 3,228 (1,471) 3,350,032 25

47 11 Segment Financial information (continued) The consolidated entity's segments have changed from that disclosed in the last annual financial report. The banking division is comprised of what were formerly identified as the MSF and ROK segments. These two businesses, as described in the foregoing, both operate in the same industry sector. The business activities that they engage in and the economic environments in which they operate are similar. ROK was acquired in December 2009 and, since that time, the consolidated entity has, and continues to, integrate the activities of ROK and MSF such that that they are operated as one business unit. The consolidated entity expects that, in due course, the activities of this segment will be conducted within one legal entity as a single seamless business unit. Taking these factors into account, it was considered appropriate to revise the basis of the segmentation of the consolidated entity. The wealth management sector, other than that it has been renamed, is the same as the TPT segment as disclosed in the last annual financial report. The basis of the measurement of segment results, assets and liabilities has not changed from prior periods. The comparative information has been revised to reflect the new segments. 26

48 Consolidated Company 30 June June June June 2013 $ '000 $ '000 $ '000 $ ' Cash and cash equivalents Cash on hand 57,958 66,835 2,807 1,605 Total cash and cash equivalents 57,958 66,835 2,807 1, Available for sale financial assets Due from banks 210, , Due from other non-bank financial institutions 111, , Total due from other financial institutions 321, , Receivables Interest receivable 1,445 1, Related party receivables - Controlled entities within the wholly owned consolidated entity - - 4,280 1,469 Other receivables 21,138 23, Total receivables 22,583 25,538 4,288 1, Loans held at amortised cost (a) Classification Residential home loans 2,833,096 2,789, Personal loans 168, , Commercial and industrial loans 50,553 57, Total loans 3,051,699 3,038, Provision for doubtful debts (826) (650) - - Total net loans 3,050,873 3,037,

49 15 Loans held at amortised cost (continued) Consolidated Company 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 (b) Provision for doubtful debts Specific provision Opening balance 650 1, Charge / (credit) against profit 200 (914) - - Write-off of previously provisioned facilities (79) Closing balance Individually assessed provisions Opening balance Charge / (credit) against profit Closing balance (c) Charge to profit for bad and doubtful debts comprises: - Bad debts recovered (1,609) (1,537) Bad debts written off directly 2,206 4, Increase / (decrease) in collective provisions 200 (914) Increase / (decrease) in specific provisions Total charge for bad and doubtful debts 852 1, There are no loans that individually represent 10% or more of shareholders' equity. The Banking Group has a diversification of the geographical location of customers, with the primary customer bases being in Tasmania and Queensland and the majority of the remaining customers being in Victoria and New South Wales. 16 Other investments Shares in Cuscal Limited 3,347 3, Shares in subsidiaries , ,511 Other Investments 1,673 1, Total other investments 5,020 5, , , Assets classified as held for sale MyState Limited Land and buildings 2, Assets classified as held for includes one freehold properties, located in Hobart. 28

50 18 Property, plant and equipment MyState Limited Furniture, fittings and equipment at cost Consolidated Land and buildings at independent valuation Land & Buildings Building Fit Outs at Cost Total $ '000 $ '000 $ '000 $ '000 $ '000 Year ended 30 June 2014 At 1 July 2013, net of accumulated depreciation 2,795 6,480 3,438 5,105 17,818 Assets classified as held for sale - - (2,125) - (2,125) Reclassification (1,253) Additions 188 1, ,550 Disposals (16) - - (368) (384) Impairment (476) (476) Depreciation charge for the year (1,085) (1,662) - (156) (2,903) At 30 June 2014, net of accumulated depreciation 2,024 6, ,573 13,496 At 30 June 2014 Cost or fair value 7,540 11, ,657 23,874 Accumulated depreciation (5,516) (4,778) - (84) (10,378) Net carrying amount 2,024 6, ,573 13,496 29

51 18 Property, plant and equipment (continued) Year ended 30 June 2013 Consolidated Land and Furniture, fittings and equipment at cost Building Fit Outs Land & Buildings at Cost buildings at independent valuation Total $ '000 $ '000 $ '000 $ '000 $ '000 At 1 July 2012, net of accumulated depreciation 4,343 5,984 3,546 2,816 16,689 Reclassification (793) (164) Additions 851 2, ,698 4,605 Disposals (386) (128) (226) - (740) Depreciation charge for the year (1,220) (1,221) (93) (202) (2,736) At 30 June 2013, net of accumulated depreciation 2,795 6,480 3,438 5,105 17,818 At 30 June 2013 Cost or fair value 7,272 9,607 3,650 5,344 25,873 Accumulated depreciation (4,477) (3,127) (212) (239) (8,055) Net carrying amount 2,795 6,480 3,438 5,105 17,818 (1) Freehold land and buildings are carried at fair value. Had these land and buildings been recognised under the cost model, the carrying amount would have been: $1,789,230 (2013: $7,363,506). 30

52 19 Intangible assets and goodwill Consolidated Goodwill Software Other Total $ '000 $ '000 $ '000 $ '000 Year ended 30 June 2014 At 1 July 2013, net of accumulated amortisation 65,978 8, ,685 Additions - 4, ,325 Disposals Amortisation - (1,723) (170) (1,893) At 30 June 2014, net of accumulated amortisation 65,978 11, ,117 At 30 June 2014 Cost (gross carrying amount) 65,978 18,651 8,573 93,202 Accumulated amortisation - (7,426) (7,659) (15,085) Net carrying amount 65,978 11, ,117 Consolidated Goodwill Software Other Total $ '000 $ '000 $ '000 $ '000 Year ended 30 June 2013 At 1 July 2012, net of accumulated amortisation 65,978 5, ,962 Additions - 4,628-4,628 Disposal - (11) - (11) Amortisation - (1,593) (301) (1,894) At 30 June 2013, net of accumulated amortisation 65,978 8, ,685 At 30 June 2013 Cost (gross carrying amount) 65,978 14,274 7,516 87,768 Accumulated amortisation - (5,680) (7,403) (13,083) Net carrying amount 65,978 8, ,685 31

53 19 Intangible assets and goodwill (continued) For the purpose of impairment testing, goodwill recognised in a business acquisition is allocated to the consolidated entity's cash-generating units (CGUs) identified according to business segments, which represent the lowest level within the consolidated entity at which the goodwill is monitored for internal management purposes. The consolidated entity has identified two CGUs, the first CGU being Banking, made up of the ADI operations of the consolidated entity, the second CGU being Wealth Management (WM). The aggregate carrying amounts of goodwill recorded within, and allocated for the purpose of impairment testing to each CGU are as follows: Consolidated CGU 30 June June 2013 $ '000 $ '000 Banking 40,189 40,189 Wealth Management 25,789 25,789 65,978 65,978 The recoverable amounts for the relevant CGUs have been determined based on value-in-use calculations using cash flow projections from financial budgets approved by Board and Management. The Company s assessment of goodwill value-in-use exceeds the carrying value allocated to the CGUs and included in the accounts. The manner in which MyState Limited conducts each impairment assessment for each CGU is discussed in the following paragraphs. Each CGU's value-in-use was determined using cash flow projections from financial budgets for the year ending 30 June 2015 approved by the Board. Various growth rates have been applied from year two through to year twenty. Cash flows are projected by undertaking detailed calculations for each income and expense category over the twenty year period. Certain income categories are modelled by projecting growth in relevant portfolio balances and the resulting income derived there-from. Other non-portfolio related income streams and expense categories are modelled by projecting real rates of growth (above inflation) for each category. Terminal value is determined at year twenty using the assumption that the CGU achieves no real growth above inflation into perpetuity. The growth rates applied do not exceed the long-term average growth rate for the business which the CGU operates. The discount rate used of 10.0% reflects the consolidated entity s post-tax nominal weighted average cost of capital, which has been calculated by externally engaged advisers and approved by the Board. Average inflation is projected to be 2.5% The method for determining value-in-use is consistent with that adopted in the comparative period. The key assumptions adopted in assessing Banking's value-in-use are the rate of growth in the balance of the housing loan portfolio and the outlook for net interest margin (NIM). Taking into account Management's past experiences and external evidence, the assumptions that have been adopted for both of these assumptions are considered to be conservative. NIM is projected to be consistent with the budget outlook, which reflects the current low interest rate environment, which depresses this figure. Management expects that, over time, these assumptions will be positively exceeded. Management s assessment of Banking's value-in-use significantly exceeds its carrying value by 35%. Any reasonably possible change to assumptions used in Management s assessment will not result in impairment. 32

54 19 Intangible assets and goodwill (continued) The key assumption adopted in assessing WM's value-in-use is the rate of growth in income derived from Management fee (MF) income. MF income is derived from its activities as the responsible entity for various Managed Investment Schemes (MIS). MF income derived is directly related to the portfolio balances of the MIS. Taking into account Management's past experiences and external evidence, the assumption adopted is considered reasonable and conservative. Management s assessment of WM's value-in-use significantly exceeds its carrying value by over 80%. Any reasonably possible change to assumptions used in Management s assessment will not result in impairment. 33

55 20 Deposits Consolidated Company 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 Deposits 2,225,690 2,310, Total deposits 2,225,690 2,310, Concentration of liabilities There are no customers who individually have deposits which represent 10% or more of total liabilities. 21 Interest bearing loans and borrowings Due to other financial institutions 988, , Total Interest bearing loans and borrowings 988, , Payables and other liabilities Accounts payable and other creditors 28,624 28, ,138 Related party payables Accrued interest payable 15,140 18, Total payables and other liabilities 43,764 47,373 1,236 1, Derivatives Interest rate swap contracts - cash flow hedges - 2, , Provisions Provision for annual leave 2,022 2, Provision for long service leave 3,572 3, ,594 5, Due to be settled within 12 months 4,874 4, Due to be settled more than 12 months 720 1, ,594 5, Opening balance 5, Settled in the financial year (1,954) (1,749) (136) (109) Increases / (decrease) to the provision 1,937 1, (225) Closing balance 5,594 5,

56 25 Share capital Consolidated Company 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 Issued and paid up capital Ordinary shares fully paid 132, , , ,170 Movements in share capital Consolidated 30 June June 2013 Number Amount Number Amount of shares $ '000 of shares $ '000 Ordinary shares Opening balance 87,153, ,241 86,977, ,786 Shares issued pursuant to the Employee share scheme of the consolidated entity 24, , Shares issued under the Executive long term incentive plan 84, , Closing balance 87,261, ,566 87,153, ,241 Movements in share capital Company 30 June June 2013 Number Amount Number Amount of shares $ '000 of shares $ '000 Opening balance 87,153, ,170 86,977, ,715 Shares issued pursuant to the Employee share scheme of the consolidated entity 24, , Shares issued under the Executive long term incentive plan 84, , Closing balance 87,261, ,495 87,153, ,170 Terms and conditions Ordinary shares have the right to receive dividends as declared from time to time and, in the event of a winding up of the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of shares and amounts paid up on the shares held. Ordinary shares entitle their holder to one vote per share, either in person or by proxy at meetings of the Company. The Company does not have authorised capital or par value in respect of its issued shares. 35

57 26 Dividends Consolidated Company Date of 30 June June June June 2013 payment $ '000 $ '000 $ '000 $ '000 a) Dividends paid 2012 Final Dividend paid - 14 cents per share 4/10/ ,182-12, Interim dividend paid - 14 cents per share 5/04/ ,196-12, Final Dividend paid - 14 cents per share 4/10/ ,205-12, Interim dividend paid - 14 cents per share 6/03/ ,212-12,212-24,417 24,378 24,417 24,378 The dividends paid during the year were fully franked at the 30 per cent corporate tax rate. b) Dividends not recognised at the end of the financial year MyState Limited At a Directors' meeting held on 21st August 2014, Directors resolved to pay a final dividend for the 2014 financial year of 14.5 cents per share or $12,653,000 total to be paid on the 3rd of October 2014, fully franked at the 30 per cent corporate tax rate. This dividend has not been brought to account as the amount had not been determined at the reporting date. This dividend will reduce the balance of the franking account by $5,423, Franking credit balance Consolidated Company 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 The amount of franking credits available for the subsequent financial year are: Franking account balance as at the end of the period at 30% (2013: 30%) 52,881 56,153 52,881 56,153 Franking credits that will arise from the payment of income tax payable at the end of the period 4, ,

58 28 Reserves MyState Limited Retained Earnings The retained earnings reserve contains amounts of retained profits that have been set aside by Directors for the purpose of funding specific projects and asset replacement that are announced from time to time. Asset revaluation reserve The asset revaluation reserve is used to record increments in the value of non current assets. Employee equity benefits reserve This reserve is used to record the value of equity benefits provided to employees as part of their remuneration. It also records the tax benefit attributable to these transactions that is recognised directly in equity. Hedging reserve The cashflow hedge reserve constitutes movements in the fair value of the underlying interest rate swap derivative where it has been deemed to be effective. If, at any stage, the derivative is deemed to be ineffective, the fair value movement is taken from the reserve to the Income Statement. Net unrealised gains reserve This reserve comprises the cumulative net change in the fair value of available-for-sale financial assets, since initial recognition or when impairment losses were recognised, until the investment is derecognised or deemed to be further impaired. 37

59 Consolidated Company 29 Statement of cash flows 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 (a) For the purpose of the Statement of Cash Flows, cash includes the items at note 1 (g) which are reconciled to the related items in the Statement of Financial Position. Cash on hand 57,958 66,835 2,807 1,605 Total cash and cash equivalents 57,958 66,835 2,807 1,605 (b) Cash flows arising from the following activities are presented on a net basis in the Statement of Cash Flows: (i) Customer deposits and withdrawals from savings and fixed-term deposit accounts; (ii) Movements in investments; (iii) Due from other financial institutions; (iv) Loans from subsidiaries; (v) Due to other financial institutions; and (vi) Customer loans. (c) Reconciliation from net profit to net cash flows provided by operating activities: Net profit after tax 29,571 28,457 24,415 24,375 Adjustments for Depreciation of non-current assets 2,903 2, Amortisation of non-current assets 1,893 1, Impairment of non-current assets Net (gain)/ loss on sale of non current assets (2) (199) - - Cash flow hedges - (2,770) - - Dividends received - - (24,417) (24,378) Bad and doubtful debts expense net of recoveries 852 1, Changes in assets and liabilities Decrease / (increase) in accrued interest Decrease / (increase) in receivables 2,402 (2,238) (4,166) (70) Decrease / (increase) in other assets (1,314) - - Decrease / (increase) in deferred tax assets 2,182 2, Increase / (decrease) in interest payable (3,371) (2,602) - - Increase / (decrease) in other payables (89) (1,051) Increase / (decrease) in derivatives - (4,355) - - Increase / (decrease) in provision for employee benefits (17) (492) (2) (334) Increase / (decrease) in provision for income tax liabilities 3,226 (777) 3,956 (2,422) Increase / (decrease) in reserves (206) 1, Net cash flows used in operating activities 39,060 26,300 (21) (3,032) 38

60 30 Financial risk management Risk management is an integral part of the consolidated entity's business processes. The Board sets policy to mitigate risks where necessary and ensure the risk management framework is appropriate, to direct the way in which the consolidated entity conducts business. Promulgated Board approved policies ensure compliance throughout the business, which are all monitored by way of a dedicated compliance system. Risk management plans exist for all documented risks within the consolidated entity and these plans are regularly reviewed by the Executive Management Team, the Group Risk Committee and the Board. The main risks faced by the consolidated entity are market risk, credit risk, liquidity risk, operational risk, legal compliance risk and documentation risk. Responsibility for management of these risks lies with the individual business units giving rise to them. It is the responsibility of the Risk Business Unit to ensure the appropriate assessment and management of these risks. Credit risk Credit risk is the risk of a counterparty failing to complete its contractual obligations when they fall due. Credit risk arises from the consolidated entity's lending activities and treasury investments. The consolidated entity's philosophy on credit risk management reflects the principle of separating prudential control from operational management. The responsibility for approval of credit exposures is delegated to specific individuals and management committees, with oversight of credit risk exposures by the consolidated entity's Risk Committee. The consolidated entity's Credit Committee monitor credit related activities through regular reporting processes. The roles of funding and oversight of credit are separated. The consolidated entity has ensured Board approved loans policies exist which outline the processes for all loan approvals by subsidiary operations. All loans over a designated amount, whether within delegated limits or not, are reported to the Company's Group Risk Committee on a regular basis. Any loan outside of delegated parameters must be approved by the Board prior to funding. The consolidated entity's policy to control credit risk includes monitoring and regulation of large exposures to single counterparties or groups of counterparties. The following tables detail the concentration of credit exposure of the consolidated entity's assets to significant counterparty types. Consolidated Equivalent S&P rating New facilities (1) Existing facilities A+ and above A- and below Closely monitored No default (3) Closely monitored No default (3) Total (2) (2) $ '000 $ '000 $ '000 $ '000 $ '000 $ '000 $ ' Cash and liquid assets 57, ,958 Due from other financial institutions 148, , ,616 Financial assets other than loans and advances 206, , ,574 Gross loans and advances at amortised cost - - 1, ,376 21,208 2,410,038 3,050,873 Total financial assets 206, ,496 1, ,376 21,208 2,410,038 3,430,447 39

61 30 Financial risk management (continued) Consolidated Equivalent S&P rating New customers (1) Existing Customers A+ and above A- and below Closely monitored No default (3) Closely monitored No default (3) Total (2) (2) $ '000 $ '000 $ '000 $ '000 $ '000 $ '000 $ ' Cash and liquid assets 66, ,835 Due from other financial institutions 248, , ,844 Financial assets other than loans and advances 315, , ,679 Gross loans and advances at amortised cost ,317 20,248 2,476,377 3,037,785 Total financial assets 315, , ,317 20,248 2,476,377 3,500,464 (1) New facilities are loans that have been funded within the financial year. (2) Closely monitored facilities are those which have overdue loan repayments in excess of 30 days or overdue overdraft repayments in excess of 14 days. (3) "No default" facilities are those facilities where there is no history of default, late payments, renegotiated terms or breach of its credit terms. 40

62 30 Financial risk management (continued) Loans and advances which were past due but not impaired Loans which are 90 or more days past due are not classified as impaired assets where the estimated net realisable value of the security is sufficient to cover the repayment of all principal and interest amounts due. Consolidated Company 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 Non-accrual loans With provisions 2,889 2, Specific provision for impairment (826) (650) - - Net non-accrual loans 2,063 1, As at 30 June 2014, the ageing of loans held at amortised cost was as follows: Past due but not impaired 31 to 60 days 16,004 8, to 90 days 6,830 3, More than 90 days 8,149 5, Total past due but not impaired 30,983 17, Impaired 2,889 2, Total 33,872 19, Fair value of collateral held 43,845 43, The Banking Group hold collateral against loans and advances to customers in the form of mortgage interest over property, other registered securities over assets and guarantees and mortgage insurance. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except where a loan is individually assessed as impaired. 41

63 30 Financial risk management (continued) Liquidity risk management Liquidity risk is the risk that the consolidated entity is unable to meet its financial and statutory obligations as they fall due, which could arise due to mismatches in cash flows. The consolidated entity's liquidity risk management framework ensures that the consolidated entity is able to meet its funding requirements as they fall due under a range of market conditions. The primary liquidity objective is to fund in a way that will facilitate growth (and income) in core business under a wide range of market conditions. The Group's ALCOs assist the Board with oversight of asset and liability management including liquidity risk management. The consolidated entity's liquidity policies are approved by the Board after endorsement by the Group Risk Committee and the Banking Group's ALCO. The Banking Group's funding and liquidity management is performed centrally by Treasury, with oversight from their ALCO. The Wealth Management's funding and liquidity management is performed centrally by the Investment Services Division. These Divisions manage liquidity on a daily basis and provide regular reports to the Group Risk Committee and the Group's ALCOs. The consolidated entity models liquidity scenarios over a twelve month timeframe, taking into account past and expected future cashflows. The objective of this modelling is to determine the consolidated entity's capacity for asset growth, whilst meeting all financial and statutory obligations over the next twelve months. The maturity analysis in this note highlights mismatches in maturities between asset and liability classes, which is taken into consideration when modelling future cashflow constraints. The consolidated entity maintains a portfolio of highly liquid assets to ensure adequate funding is available under all forseeable conditions. These liquid assets are held to cover both known and contingent funding outflows. The assets are predominantly held in the most liquid asset classes such as short dated inter-bank deposits. The Banking Group's Treasury and the Wealth Management Groups Investment Services Divisions undertake regular reviews of the liquidity characteristics of the consolidated entity's Statement of Financial Position, which provides an understanding of the liquidity characteristics of assets and liabilities against a backdrop of changing market conditions. The analysis ensures that the Statement of Financial Position is able to be appropriately funded and the liquidity ramifications of market conditions are clearly understood. 42

64 30 Financial risk management (continued) Liquidity facilities The consolidated entity has an approved overdraft of $13.5 million with Cuscal Limited. Cuscal Limited holds an equitable charge over all the assets of MSF as security for facilities provided. In addition, there is an MSF uncommitted $20 million overnight facility with the National Australia Bank. Bendigo and Adelaide Bank Limited (BABL) provides an overdraft facility of $100,000, a business card facility of $100,000, and an asset purchase/lease facility of $200,000. At 30 June 2014, the ConQuest Securities securitisation program had a number of support facilities available provided by Westpac Banking Corporation, including a $5 million cash advance facility specifically available to meet cash shortfalls as a result of the timing of the receipt of payments on loans and a $200 million liquidity facility available for the repayment of maturing ConQuest notes in the event that the notes could not be reissued within the market place at the time of maturity. As at 30 June 2014, this facility had not been used since the inception of the program. A liquidity facility of $1.4 million is supplied to the ConQuest Trust by the Commonwealth Bank of Australia Limited for the express purpose of meeting any payment shortfalls as defined in the ConQuest Series Notice. At reporting date, this facility had not been used. A liquidity facility of $3.6 million is available to the ConQuest Trust by the Westpac Banking Corporation for the express purpose of meeting any payment shortfalls as defined in the ConQuest Series Notice. At reporting date, this facility has not been used. ConQuest R Trust has collateral liquidity of $1 million held in a separate account with Bankwest to provide liquidity support. As at 30 June 2014, this facility has not been used. The ConQuest Trust has collateral liquidity of $2.1 million held in a separate account with Bankwest to provide liquidity support which can be used. MSF provides a redraw facility to the ConQuest Trust of $500,000 to meet redraw commitments if there are cash shortfalls. MSF provides a redraw facility to the ConQuest Trust of $454,000 to meet redraw commitments if there are cash shortfalls. As at 30 June 2014, all facilities had not been used. A number of facilities are provided to entities controlled by the ROK. The RBS Trust has collateral liquidity of $1.4 million held in a separate account with Westpac Banking Corporation to provide liquidity support. This facility was wound up after the call of this transaction in July 2013, and this facility had not been used up to this time. The following table summarises the maturity profile of financial assets and liabilities as at 30 June 2014 based on contractual undiscounted repayment obligations. Repayments, which are subject to notice, are treated as if notice was given immediately. However, it is expected that many customers will not request repayment on the earliest date that the consolidated entity could be required to pay and the table does not reflect the expected cashflows indicated by deposit retention history. 43

65 30 Financial risk management (continued) Consolidated On demand 3 months Between 3 months Between 1 More than Total or less and 1 year and 5 years 5 years $ '000 $ '000 $ '000 $ '000 $ '000 $ ' Assets Available for sale assets 4, ,576 49,725 25,013 1, ,616 Receivables - 22, ,583 Loans 95,780 61, , ,686 1,832,352 3,050,873 Other investments 4,020 1, ,020 Total 103, , , ,699 1,833,594 3,400,092 Liabilities Due to Banks and other financial institutions - 477, ,512 11, , ,942 Deposits 1,053, , ,869 33,137-2,225,690 Payables - 43, ,764 Total 1,053,934 1,091, ,381 44, ,416 3,258,396 Net mismatch (950,074) (764,609) (441,361) 857,562 1,440, ,696 Consolidated On demand 3 months Between 3 months Between 1 More than Total or less and 1 year and 5 years 5 years $ '000 $ '000 $ '000 $ '000 $ '000 $ ' Assets Available for sale assets 10, ,385 65,408 89, ,844 Receivables - 25, ,538 Loans 117,841 68, , ,136 1,766,266 3,037,785 Other investments 4,020 1, ,020 Total 131, , , ,166 1,766,266 3,464,187 Liabilities Due to Banks and other financial institutions - 434,969 40, , ,805 Deposits 968, , ,689 36, ,310,298 Payables - 47, ,373 Total 968,372 1,180, ,468 36, ,224 3,338,476 Net mismatch (836,490) (853,954) (396,089) 951,202 1,261, ,711 Derivative financial liabilities (135,000) 10, ,000 44

66 30 Financial risk management (continued) Market Risk Market risk is the exposure to adverse changes in the value of the consolidated entity's portfolio as a result of changes in market prices or volatility. The consolidated entity is exposed to the following risks: Interest rates: changes in the level, shape and volatility of yield curves; The basis between different interest rate securities; and Derivatives and credit margins. The following sensitivity analysis is based on the interest rate risk exposures in existence at the reporting date, with all other variables held constant. Judgements of reasonably possible movements: Net profit after tax higher/(lower) $ '000 $ ' % (100 basis points) 5,785 5, % (50 basis points) (2,893) (2,616) Derivative financial Instruments The consolidated entity uses derivatives to hedge asset/liability management and only enters into cash flow hedges to mitigate the exposure to volatility in future interest cash flows. At 30 June 2014, the fair value of outstanding derivatives held and designated as cash flow hedges was $Nil (2013: $2,988,040). The consolidated entity only uses interest rate swaps for hedging purposes. Swap transactions provide for two parties to swap a series of interest rate cash flows in relation to an underlying principal amount, usually to exchange fixed interest for a floating interest rate. MSF provides a Basis Swap to the ConQuest RMBS Trust and Conquest Trust to reduce the potential volatility in changing rates given a potential delay in effecting a lending rate change against an immediate change in the base rate of the notes (i.e. BBSW). Given the amount of the payments, the consolidated entity does not consider the amounts to be material to require the derivative to be valued on the face of the Statement of Financial Position. ROK provides Interest Rate Swaps to the RBS Warehouse Trust No2 and the RBS Trust 2009R, to convert the loan interest of these trusts from fixed to floating, which is consistent with the character of the interest on the notes that have been issued by the trusts. As the Interest Rates Swaps are between entities within the consolidated group, their fair value is not shown on the face of the Statement of Financial Position. 45

67 30 Financial risk management (continued) The consolidated entity uses Value-At-Risk (VAR) to monitor market risk. VAR is a statistical measure based on a 20 day holding period and 99 per cent confidence level. The consolidated entity uses a historical simulation method for the calculation of VAR. VAR focuses on unexceptional prices moves and it does not account for losses that occur beyond the 99 per cent level of confidence. These factors can limit the effectiveness of VAR in predicting future price moves when changes to future risk factors deviate from the movements expected by the assumptions. The following table shows the average, maximum and minimum VAR over the year for interest rate market risk. Consolidated Entity Company $M $M $M $M Average Maximum Minimum

68 30 Financial risk management (continued) Interest rate risk The consolidated entity also has exposure to interest rate risk generated by banking products such as loans and deposits. Interest rate risk is assessed by the consolidated entity's Group Risk Committee and ALCO on a regular basis. The consolidated entity has entered into interest rate swaps to reduce the exposure to fluctuations in variable interest rates. These derivative instruments have been classified as cash flow hedges. The following table represents the consolidated entity's contractual interest rate risk sensitivity from repricing mismatches as at 30 June 2014 and the corresponding weighted average effective interest rates. Consolidated Asset and Liability Repricing Floating interest rate 1 year or less Between 1 and 5 years More than 5 years Non interest bearing Carrying amount in Statement of Financial Position $ '000 $ '000 $ '000 $ '000 $ '000 $ '000 % Weighted average effective interest rate 2014 Assets Cash and liquid assets 44, ,503 57, % Available for sale assets - 295,360 25,013 1, , % Receivables ,583 22, % Loans 2,487,888 28, , ,068-3,050, % Other investments - 1, ,020 5, % Total financial assets 2,532, , , ,311 40,106 3,458,050 Liabilities Deposits 1,053, , ,559 32,454-2,225, % Interest bearing liabilities and borrowings - 405,929 11, , , % Payables and other liabilities ,764 43, % Total financial liabilities 1,053,934 1,127, , ,467 43,764 3,258,396 Net mismatch 1,478,409 (802,754) (293,187) (179,156) (3,658) 199,654 47

69 30 Financial risk management (continued) Consolidated Asset and Liability Repricing Floating interest rate 1 year or less Between 1 and 5 years More than 5 years Non interest bearing Carrying amount in Statement of Financial Position Weighted average effective interest rate $ '000 $ '000 $ '000 $ '000 $ '000 $ '000 % 2013 Assets Cash and liquid assets 52, ,842 66, % Available for sale assets 9, ,793 89, , % Receivables ,538 25, % Loans 2,468, , , ,037, % Other investments - 1, ,020 5, % Total financial assets 2,530, , , ,976 3,531,022 Liabilities Deposits 968,372 1,304,795 36, ,310, % Interest bearing liabilities and borrowings - 781, , , % Payables and other liabilities - 1, ,236 47, % Total financial liabilities 968,372 2,086,958 36, ,946 46,236 3,338,476 Net mismatch 1,562,525 (1,518,221) 349,907 (199,405) (2,260) 192,546 Derivatives (245,000) 110, ,

70 30 Financial risk management (continued) Capital management strategy The consolidated entity s capital management strategy is to maximise shareholder value through optimising the level and use of capital resources, whilst also providing the flexibility to take advantage of opportunities as they may arise. Continue to support MSF s and ROK's credit ratings; Ensure sufficient capital resource to support the consolidated entity s business and operational requirements; Maintain sufficient capital to exceed prudential capital requirements; and Safeguard the consolidated entity s ability to continue as a going concern. The consolidated entity s capital management policy covers both internal and external capital threshold requirements. The consolidated entity has developed a detailed Internal Capital Adequacy Assessment Plan (ICAAP). This plan covers the capital requirements of the Company and also MSF, ROK and TPT. The ICAAP aims to ensure that adequate planning activities take place so that the consolidated entity is efficiently capitalised to a level also satisfactory to regulators. The ICAAP caters for all known financial events, dividend policy, capital raisings, securitisation and the potential to establish a dividend reinvestment plan in the future. The consolidated entity is subject to minimum capital requirements externally imposed by Australian Prudential Regulatory Authority (APRA), following the guidelines developed by the Basel Committee on Banking Supervision. MSF and ROK report to APRA as Authorised Deposit Taking Institutions (ADI). The Company reports to APRA as a non-operating holding company (NOHC). As at reporting date, MSF's Level One capital adequacy ratio was 13.31% (2013: 13.46%), ROK's Level One capital adequacy ratio was 13.54% (2013: 13.45%) and the consolidated entity's Level Two ratio was 13.81% (2013: 14.04%). Regulatory capital requirements are measured for MSF, ROK and certain subsidiaries which meet the definition of extended licensed entities (Level 1 reporting) and for the Group (Level 2 reporting). Level 2 consists of MSF, ROK, their subsidiaries and immediate parent less certain subsidiaries of MSF and ROK which are deconsolidated for APRA reporting purposes. These entities conduct non-financial operations or are special purpose vehicles. APRA requires ADIs to have a minimum ratio of capital to risk weighted assets of 8 per cent at both Level 1 and Level 2, with at least four per cent of this capital in the form of Tier 1 capital. In addition, APRA imposes ADI specific minimum capital ratios which may be higher than these levels. The consolidated entity's capital management policy, set by the Board, requires capital floors above this regulatory required level. 49

71 30 Financial risk management (continued) MSF, ROK and certain subsidiaries utilise residential mortgage backed securities programmes to manage liquidity and capital adequacy requirements, in accordance with the operational needs of the business. MSF s and ROK Limited's Tier 1 capital consists of share capital and retained earnings. Deductions from Tier 1 capital are made for intangibles, certain capitalised expenses, deferred tax assets and equity investments over prescribed limits. In addition, MSF and ROK are required by APRA to deduct investments in subsidiaries that are special purpose securitisation vehicles from Tier 1 capital. The consolidated entity's Tier 2 capital includes the general reserve for credit losses as required by APRA. MSF, ROK and the consolidated entity have complied with all internal and external capital management requirements throughout the year. Operational risk Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The consolidated entity cannot expect to eliminate all operational risks, but it endeavours to manage these risks through a control framework and by monitoring and responding to potential risks. Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, such as the use of internal audit. 50

72 31 Average balances and related interest The following table shows the major categories of interest-earning assets and interest-bearing liabilities, together with their respective interest earned or paid by the consolidated entity and average interest rates. Averages used are predominantly monthly averages. Interest income figures include interest income on non-accruing loans to the extent that cash payments have been received. Consolidated Consolidated Average Interest Average Average Interest Average balance rate balance rate $ '000 $ '000 % $ '000 $ '000 % Average assets and interest income Interest-earning assets Cash and liquid assets 62,397 1, % 73,291 1, % Due from other financial institutions 363,750 12, % 338,420 16, % Loans 3,044, , % 3,059, , % Total average interest-earning assets 3,470, , % 3,471, , % Non interest earning assets Property, plant and equipment 93, % 19, Other assets 29, % 102, Total average non interest earning assets 122, % 122, Total average assets 3,592, , % 3,593, , % Average liabilities and interest expense Interest-bearing liabilities Deposits 1,956,656 63, % 2,334,803 80, % Due to other financial institutions 311,338 7, % 289,772 13, % ConQuest Notes and bonds on issue 984,873 21, % 715,357 25, % Total average interest-bearing liabilities 3,252,867 93, % 3,339, , % Non interest bearing liabilities Other 55, % 47, Total average non interest bearing liabilities 55, % 47, Total average liabilities 3,308,608 93, % 3,387, , % Reserves 282, % 274, Total average liabilities and reserves 3,591,287 93, % 3,661, , % 51

73 32 Maturity analysis of assets and liabilities The following table shows the maturity profile of the consolidated entity's assets and liabilities. This analysis is based upon contractual terms. Consolidated At call Overdraft Due within Due between Due between Due in over No maturity Total 3 months 3 and 12 1 year and 5 years specified months 5 years $ '000 $ '000 $ '000 $ '000 $ '000 $ '000 $ '000 $ ' Assets Cash and liquid assets 57, ,958 Due from other financial institutions 4, ,575 49,725 25,013 1, ,616 Receivables , ,583 Loans - 92,806 7,376 24,849 50,826 2,875,016-3,050,873 Other investments 4,020-1, ,020 Total financial assets 66,038 92, ,534 74,574 75,839 2,876,259-3,458,050 Liabilities Deposits Due to other financial institutions Accounts payable and other liabilities Total financial liabilities 1,053, , ,869 33, ,225, , ,512 11, , , , ,764 1,053,934-1,091, ,381 44, ,416-3,258,396 Consolidated At call Overdraft Due within Due between Due between Due in over No maturity Total 3 months 3 and 12 1 year and 5 years specified months 5 years $ '000 $ '000 $ '000 $ '000 $ '000 $ '000 $ '000 $ ' Assets Cash and liquid assets 66, ,835 Due from other financial institutions 10, ,385 65,408 89, ,844 Receivables , ,502 Loans - 105,019 12,871 43, ,234 2,660,552-3,037,785 Other investments - - 1, ,020 5,020 Total financial assets 76, , , , ,264 2,660,552 4,020 3,530,986 Liabilities Deposits Due to other financial institutions Accounts payable and other liabilities Total financial liabilities 968, , ,689 36, ,310, ,969 40, , , , , ,372-1,180, ,468 36, ,224-3,338,476 52

74 33 Net fair value The aggregate net fair values of financial assets and financial liabilities, at balance date, are as follows: Consolidated Carrying Net fair Carrying Net fair value value value value $ '000 $ '000 $ '000 $ '000 Assets Cash and liquid assets 57,958 57,958 66,835 66,835 Due from other financial institutions 321, , , ,844 Receivables 25,502 25,502 25,502 25,502 Loans 3,050,873 3,144,546 3,037,785 3,043,938 Other investments 5,020 5,020 5,020 5,020 Land and buildings 4,633 4,633 8,543 8,543 Total financial assets 3,465,602 3,559,275 3,539,529 3,545,682 Liabilities Deposits 2,225,690 2,310,031 2,310,298 2,310,462 Due to other financial institutions 988, , , ,805 Accounts payable 43,764 43,764 47,373 47,373 Total financial liabilities 3,258,396 3,342,737 3,338,476 3,338,640 Fair values have been determined as follows: - All assets and liabilities with a maturity of less than 12 months were determined based on the assumption that the carrying amounts in the Statement of Financial Position approximate fair value because of their short term to maturity. - The fair value of available for sale financial assets with more than 12 months to maturity are $ million. - The fair value of loans at amortised cost includes loans with a floating interest rate of $2, million. Loans with a fixed interest rate and more than 12 months to maturity are $ million. - The net fair value of deposits with more than 12 months to maturity assumes the carrying amount is discounted by the market rate. - The net fair value of fixed loans with more than 12 months to maturity assumes the carrying amount is discounted by the market rate. - The fair value of Land and buildings has been determined by an independent valuer using observable market data. 53

75 34 Contingent liabilities and expenditure commitments (a) Lease expenditure commitments MyState Limited Consolidated Company 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 (i) Operating leases - not later than 1 year 3,527 4, later than 1 and not later than 5 years 10,139 13, later than 5 years 14,158 20, Total lease expenditure contracted for at balance date 27,824 38, The consolidated entity occupies a number of properties which house its branch network. The leases for these properties are on normal commercial terms and conditions. The usual initial term for these leases is five years. In the 2012 period, MSF commenced leasing its Headquarters building located in Hobart. The term of the lease is fifteen years, with an option for a further ten year term. Rental increases over the term of the lease are determined by reference to movements in the consumer price index. The consolidated entity also entered into a lease of a property situated in Launceston, which is principally used to house elements of the TPT business. The term of the lease is five years with an option for two further five year terms. Rental increases over the term of the lease are determined by reference to movements in the consumer price index. If the options for further terms are exercised, the rental is to be determined by market appraisal at that time. Other operating leases have an average term of 3 years and are non-cancellable. Assets that are the subject of operating leases are computer equipment and property. (b) Loans approved but not advanced 46,742 30, (c) Undrawn continuing lines of credit 81,611 88, (d) Performance guarantees 1,667 2, MSF has provided guarantees to third-parties in order to secure the obligations of customers. The range of situations in which guarantees are given include: - Local Government Authorities, to secure the obligations of property and sub-divisional developers to complete infrastructure developments; - Local Government Authorities, Schools and other building owners, to secure the obligations of building contractors to complete building works; - Landlords, to secure the obligations of tenants to pay rent; and - CUSCAL, to secure payroll and direct debit payments processed by CUSCAL on behalf of customers. Guarantees are issued in accordance with approved Board policy. Those guarantees over $10,000 are required to be secured. In the event that a payment is made under a guarantee, the customer's obligation to MSF is crystallised in the form of an overdraft or loan. 54

76 Consolidated Company 30 June June June June 2013 $ '000 $ '000 $ '000 $ ' Contingent liabilities and expenditure commitments (continued) (e) Bank Guarantee 1,000 1, The consolidated entity is a non-broker participant in the Clearing House Electronic Sub register System operated by the Australian Securities Exchange and has provided a guarantee and indemnity for the settlement account from Bendigo and Adelaide Bank Limited (BABL). The consolidated entity maintains a deposit with BABL for $1,000,000 (2013: $1,000,000) as collateral for the guarantee. (f) Loan Guarantees TPT has given guarantees to Local Government Authorities to secure the obligations of property and sub-divisional developers to complete infrastructure developments required of them. The developers are borrowers from managed funds for which TPT is the Responsible Entity. The developers provide cash or real property as security for the consolidated entity providing the loan guarantee. (g) Contracts The consolidated entity has contracted computer requirements to Transaction Solutions Proprietary Limited. (h) Estate Administration MyState Limited The consolidated entity acts as executor and trustee for a significant number of trusts and estates. In this capacity, the consolidated entity has incurred liabilities for which it has a right of indemnity out of the assets of those trusts and estates. Accordingly, these liabilities are not reflected in the financial statements. 55

77 35 Capital and other expenditure commitments Other contracted commitments for expenditure on plant and equipment as at the reporting date are for only minimal amounts. 36 Employee benefits The aggregated employee benefit liability is comprised of the following: Consolidated Company Note 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 Bonus 431 1, Provisions 24 5,594 5, Total employee benefits 6,025 6, Superannuation commitments Superannuation plans have been established for the provision of benefits to employees on retirement, death or disability. Benefits provided under the plan are based on contributions for each employee. Employees contribute various percentages of their annual salaries and the consolidated entity contributed between 9% and 14% of the employees annual salaries, thus complying with the Superannuation Guarantee Legislation. As the superannuation plans are accumulation schemes, the consolidated entity does not guarantee their performance. 37 Related parties (i) Ultimate Parent Company MyState Limited is the ultimate parent company. (ii) Significant subsidiaries Country of Ownership interest Name incorporation 30 June June 2013 % % MyState Financial Limited Australia Tasmanian Perpetual Trustees Limited Australia Connect Asset Management Proprietary Limited Australia The Rock Building Society Limited Australia (iii) Subsidiaries Transactions between the Company and the consolidated entities principally arise from the provision of management and governance services. All transactions with subsidiaries are in accordance with regulatory requirements, the majority of which are on commercial terms. All transactions undertaken during the financial year with the consolidated entities are eliminated in the consolidated financial statements. Amounts due from and due to entities are presented separately in the statement of financial position of the Company except where offsetting reflects the substance of the transaction or event. 56

78 37 Related parties (continued) Consolidated Company 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 Management fees received - - 7,172 7,233 Dividends ,419 24,373 The following balances with subsidiaries were outstanding as at financial year end: Amounts receivable - - 4,280 (553) Amounts payable ,468 (iv) Managed Investment Schemes Within the consolidated entity, TPT is a Responsible Entity for Managed Investment Schemes (Funds) and, accordingly, has significant influence over their activities. TPT receives management fees from these Funds. TPT also pays expenses of the Funds for which it is reimbursed. TPT has also invested in these Funds and receives distributions on these investments. These investments are made on the same terms and conditions that apply to all investors in these Funds. Details of these transactions and balances are as follows: TPT 30 June June 2013 $ '000 $ '000 Management fees received 9,188 8,950 Balance of investment held at year end 6,346 5,299 Distributions received from managed funds The Company has invested in these Funds and receives distributions on these investments. These investments are made on the same terms and conditions that apply to all investors in these Funds. Details of these transactions and balances are as follows: Consolidated Company 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 Management fees received 9,188 8, Balance of investment held at year end 13,498 9,317 7,152 4,018 Distributions received from managed funds The Funds have: - Accepted money on deposit from Directors and Executives or entities associated with Directors and Executives at prevailing Fund rates and conditions; - Loaned money to MSF, in the form of term deposits, totalling $10.1 million (2013: $18.1 million); and - Loaned money to ConQuest Trust, in the form of Class B RMBS notes, totalling $8.7 million (2013: $10.3 million). These deposits are made on the same terms and conditions that apply to all similar transactions. 57

79 37 Related parties (continued) (v) MyState Financial Limited The Group has a securitisation program which is utilised to provide regulatory capital relief. Under this program, MSF and Rock sell loans to special purpose vehicles transferring the risks of these loans and the vehicles fund the purchases of these sales by issuing notes in the trust to wholesale investors. The assets and liabilities of the trusts are proportionally consolidated in to the Group as the Group retains the rights to the variable returns of the loans that it has transferred in to the trusts. The Group has established Connect Asset Management Proprietary Limited, ConQuest Trust, ConQuest R Trust, ConQuest Trust through MSF. The Group has established the RBS Trust, RBS 2009R Trust, and RBS Warehouse Trust #2 through the ROK. Both MyState Financial and the Rock Building Society have an interest in the ConQuest Trust and ConQuest Mortgage Trust. The special purpose vehicles are charged a range of fees to the trusts for the management and operation of the loans transferred to them. These transactions are conducted on an arm's length basis in the normal course of business and on commercial terms and conditions and are eliminated on consolidation. Details of the transactions with these related parties are as follows: Loan servicing fee A loan servicing fee based on the outstanding monthly balance of the loans sold to the trust is charged to each Trust at an interest rate of 0.25% per annum to cover the servicing of the loan portfolio transferred. MSF charges Loan Servicing Fees to ConQuest R Trust and Conquest Trust. The ROK charges Loan Servicing Fees to RBS Trust, RBS 2009R Trust and RBS Warehouse Trust #2. Conquest Mortgage Trust and the Conquest Trust has loans sold to it from both MSF and ROK, each company charges the trust a loan servicing fee based on the percentage of outstanding loans that it has sold to the trust. Interest rate swaps ROK and the RBS 2009R Trust have entered into an interest rate swap contract. Payments under this contract are determined on the outstanding monthly balance of the fixed rate loans sold into the RBS 2009R Trust at a rate calculated as the difference between the weighted average interest rate of the outstanding fixed rate loans and the one month BBSW rate plus the required swap margin. ROK and the RBS Warehouse Trust #2 have entered into an interest rate swap contract. Payments under this contract are determined on the outstanding monthly balance of the fixed rate loans sold into the RBS Warehouse Trust #2 at a rate calculated as the difference between the weighted average interest rate of the outstanding fixed rate loans and the one month BBSW rate plus the required swap margin. ROK and the ConQuest Trust have entered into an interest rate swap contract. Payments under this contract are determined on the outstanding monthly balance of the fixed rate loans sold into the ConQuest Trust at a rate calculated as the difference between the weighted average interest rate of the outstanding fixed rate loans and the one month BBSW rate plus the required swap margin. 58

80 37 Related parties (continued) Custodian and management fees Connect Asset Management Proprietary Limited operates as the manager for the ConQuest and RBS securitisation programmes and has since October The ROK operates in the role of custodian for assets originated via the Rock Building Society. Details of these transactions with these related parties are as follows: Receivable / (payable) at year end Swap interest income / (expense) Service fees income / (expense) Loans securitised at year end $ 000 $ 000 $ 000 $ MyState Financial Limited 872-3,513 (421,614) - Connect Asset Management Proprietary Limited 527-5, ConQuest Mortgage Trust (311) - (6,106) 129,630 - ConQuest Securities 162-4, ConQuest R Trust (238) - (5,711) 104,137 - ConQuest Trust (233) - (1,353) 94,961 - ConQuest Trust (686) (1,283) ,001 - ConQuest Trust (93) - 1,325 55,163 - The Rock Building Society Limited 9 1,832 (2) (189,278) - RBS Trust RBS 2009R Trust (9) (3) (1,093) - - RBS Warehouse Trust #2 - (546) (304) MyState Financial Limited (710) - 2,194 (445,784) - Connect Asset Management Proprietary Limited (42) - - ConQuest Mortgage Trust (224) - (183) 149,701 - ConQuest Securities ConQuest R Trust (265) 100,267 - ConQuest Trust 75 - (1,491) 125,832 - ConQuest Trust (5) - (212) 86,621 - The Rock Building Society Limited 27 2,429 3,640 (333,338) - RBS Trust - - (23) - - RBS Trust - - (77) 25,795 - RBS 2009R Trust (27) (260) (2,754) 37,094 - RBS Warehouse Trust #2 - (2,169) (786) 253,812 59

81 37 Related parties (continued) (vi) Key Management Personnel a) Individual Directors and Executive compensation disclosures Information regarding individual Directors and Executive compensation and some equity instruments disclosures, as required by the Corporations Regulation 2M.3.03, is provided in the Remuneration Report section of the Directors' report. Disclosure of the compensation and other transactions with key management personnel (KMP) is required pursuant to the requirements of Australian Accounting Standard AASB 124 Related Party Disclosures. The KMP of the consolidated entity is comprised of the non Executive Directors, Managing Director and certain Executives. b) Key management personnel compensation The key management personnel compensation comprised: Consolidated Company 30 June June June June 2013 $ '000 $ '000 $ '000 $ '000 Short-term employee benefits 3,266 3,532 2,442 2,759 Post employment benefits Share-Based payment (1) Termination benefits ,321 5,076 3,414 4,212 (1) These amounts are estimates of compensation and include a portion that will only vest to the Managing Director or Executive when certain performance criteria are met or a 'Capital Event' occurs, refer note 38. The fair value of shares is calculated at the date of grant and is allocated to each reporting period over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the shares allocated to this reporting period. 60

82 38 Share Based Payment Arrangements a) Executive long term incentive plan (ELTIP) The Executive long term incentive plan (ELTIP) was established by the Board to encourage the Executive Management Team (EMT), currently comprising the Managing Director and invited Executives, to have a greater involvement in the achievement of the Company's objectives. To achieve this aim, the ELTIP provides for the issue to the EMT of fully paid ordinary shares in the Company if performance criteria specified by the Board are satisfied in a set performance period. The value of the offer is converted into fully paid ordinary shares, based upon the weighted average price of the Company's shares over the twenty trading days prior to the offer date. The Board has, for the time being, set the three financial years commencing with the year in which an offer is made under the plan as the performance period. The Board has determined that Total Shareholder Return (TSR) measured against the performance of a selected group of "financial" companies from within the S&P/ASX 300 Index (the benchmark group) would be the performance criteria. The fair value of shares offered is calculated at the date of grant and is allocated to each reporting period over the period from grant date to vesting date. Fair value is determined utilising a "Monte Carlo" simulation, which seeks to predict the performance of the Company against the benchmark group and the proportion of shares offered which will actually vest. This predicted value is discounted back to its present value at grant date and excludes the value of dividends which are not received during the performance period. Details of offers made under the ELTIP are as follows: "2010" Offer "2011" Offer Managing Director Other Executives Managing Director Other Executives Date of offer ("Grant" date) 29 Mar Mar Nov Sep 2011 Performance period 1/7/2010 to 30/6/2013 1/7/2010 to 30/6/2013 1/7/2011 to 30/6/2014 1/7/2011 to 30/6/2014 Maximum number of shares that may vest under the offer 59, ,731 65,677 88,403 Value of the offer $225,000 $393,789 $235,125 $316,482 Share price used in the calculation of the offer $3.76 $3.76 $3.58 $3.58 EPS baseline used in the offer (cents per share) 27.46cps 27.46cps n/a n/a MyState Limited share price baseline for TSR calculation $3.12 $3.12 $3.55 $3.55 Fair value of shares at grant date: EPS shares $3.11 $3.11 n/a n/a TSR shares $2.43 $2.43 $2.14 $1.93 Number of shares that have vested 42,427 57,826-23,009 Number of shares that have been forfeited 17,413 46,905 65,677 43,799 Number of shares for which assessment against performance criteria has yet to be undertaken ,595 61

83 38 Share Based Payment Arrangements (continued) "2012" Offer "2013" Offer Managing Other Executives Managing Other Executives Director Director Date of offer ("Grant" date) 14 Nov Oct Dec Dec 2013 Performance period 1/7/2012 to 30/6/2015 1/7/2012 to 30/6/2015 1/7/2013 to 30/6/2016 1/7/2013 to 30/6/2016 Maximum number of shares that may vest under the offer 89,532 77,003 67,967 45,658 Value of the offer $325,000 $259,500 $327,600 $220,069 Share price used in the calculation of the offer $3.63 $3.37 $4.82 $4.82 MyState Limited share price baseline for TSR calculation $3.00 $3.00 $4.30 $4.30 Fair value of shares at grant date: TSR shares $2.15 $1.66 $2.63 $2.63 Number of shares that have vested 27, Number of shares that have been forfeited 61,988 28,487 67,967 - Number of shares for which assessment against performance criteria has yet to be undertaken - 48,516-45, Events subsequent to balance date There were no matters or circumstances that have arisen since the end of the year which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial periods. 62

84 In accordance with a resolution of the Directors of MyState Limited, we state that: 1. In the opinion of the Directors: MyState Limited Directors' Declaration for the financial year ended 30 June 2014 (a) The financial statements and notes of the consolidated entity set out on pages 1 to 62 are in accordance with the Corporations Act 2001, including: (i) Giving a true and fair view of the consolidated entity's financial position as at 30 June 2014 and of its performance for the year ended on that date; and (ii) Complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (b) There are reasonable grounds to believe that MyState Limited will be able to pay its debts as and when they become due and payable. 2. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 by the Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June The financial statements and notes also comply with International Financial Reporting Standards as disclosed in note 1(c). This declaration is made in accordance with a resolution of the Directors. On behalf of the Board M L Hampton Chairman C M Hollingsworth Director Hobart Dated this 21August

85 Independent auditor's report to the members of MyState Limited Report on the financial report We have audited the accompanying financial report of MyState Limited which comprises the statements of financial position as at 30 June 2014, the income statements and statements of comprehensive income, the statements of changes in equity and the statements of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors' declaration of the company and the consolidated entity comprising the company and the entities it controlled at the year's end or from time to time during the financial year. Directors' responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor's responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity's preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1 st floor 160 Collins Street Hobart 7000, PO Box 1083 Hobart TAS 7001 Tel: (03) Fax: (03) @wlf.com.au Internet: Partners: Harvey Gibson, Danny McCarthy, Douglas Thomson, Joanne Doyle, Stuart Clutterbuck, Ian Wheeler, Dean Johnson, Marg Marshall, Paul Lyons, Alicia Leis, Nick Carter Managers: Melanie Richardson, Simon Jones, Trent Queen, Rachel Burns, Nathan Brereton, Melissa Johnson, Donna Powell, Chris Harper, Rebecca Meredith Consultant: Peter Beven